How might a coffee shop chain use hedging?

A coffee shop chain can effectively use hedging by purchasing futures contracts on coffee beans. This practice allows the business to lock in prices for coffee at a predetermined rate for a future date. By doing so, the coffee shop mitigates the risk of price fluctuations in the coffee market, which can be influenced by various factors such as changes in weather conditions, supply chain disruptions, or shifts in consumer demand.

When coffee prices rise, the shop benefits from having secured a lower price in advance, protecting its profit margins. On the other hand, if prices fall, the business would still have to honor the contracts, potentially leading to a higher cost than necessary. However, the primary goal of hedging in this context is to manage risk and stabilize costs, thus allowing the coffee shop to plan its budget and pricing strategy more effectively.

While the other options represent valuable business strategies, they do not directly address the need to protect against price volatility in essential commodities like coffee beans. Investing in marketing campaigns, taking loans to increase inventory, or diversifying product offerings may enhance business growth and resilience, but they do not serve the specific financial risk management function that hedging does through the use of futures contracts.