5. Hedging strategy to protect against rising prices A long hedge is a risk management strategy in which a company can lock in the price of the commodity that can be purchased in the future. Consider the case of Green Grains Inc., a flour manufacturer: In May, Green Grains Inc. placed a long futures position to hedge against a possible increase in the price of wheat, a key raw material in the production of flour. Based on the selling price that Green Grains earns from its customers, the maximum price that it can pay for wheat is $7.40 per bushel to break even. You also have the following information and assumptions: The current spot price of wheat is $5.55 per bushel, and the September futures price of the commodity is $6.29 per bushel. At $6.29 per bushel, the company will easily break even and make some profit, so it wants to lock in this purchase price for delivery in September Wheat futures contracts trade in a standard size of 5,000 bushels. To meet its production requirements, Green Grains buys 20 future contracts. In September, the spot price of wheat rose to $8.88 per bushel, and the price of wheat futures rose to $9.47 per bushel. Based on your understanding of the long hedge strategy, complete the transactions in the futures and cash markets. Futures Market In September, the spot price of wheat rose to $8.88 per bushel, and the price of wheat futures rose to $9.47 per bushel. Based on your understanding of the long hedge strategy, complete the transactions in the futures and cash markets. Futures Market Net gain or loss in the futures market: $259,000 -$629,000 $947,000 - $ 148,000 Cash Market Net gain or loss in the cash market: $318,000 - $740,000 -$148,000 $888,000 Thus, the gain and loss offset each other, and the company benefits from placing the long hedge. The company earns a net profit of and helps protect the producer to purchase a commodity against rising prices. 5. Hedging strategy to protect against rising prices A long hedge is a risk management strategy in which a company can lock in the price of the commodity that can be purchased in the future. Consider the case of Green Grains Inc., a flour manufacturer: In May, Green Grains Inc. placed a long futures position to hedge against a possible increase in the price of wheat, a key raw material in the production of flour. Based on the selling price that Green Grains earns from its customers, the maximum price that it can pay for wheat is $7.40 per bushel to break even. You also have the following information and assumptions: The current spot price of wheat is $5.55 per bushel, and the September futures price of the commodity is $6.29 per bushel. At $6.29 per bushel, the company will easily break even and make some profit, so it wants to lock in this purchase price for delivery in September Wheat futures contracts trade in a standard size of 5,000 bushels. To meet its production requirements, Green Grains buys 20 future contracts. In September, the spot price of wheat rose to $8.88 per bushel, and the price of wheat futures rose to $9.47 per bushel. Based on your understanding of the long hedge strategy, complete the transactions in the futures and cash markets. Futures Market In September, the spot price of wheat rose to $8.88 per bushel, and the price of wheat futures rose to $9.47 per bushel. Based on your understanding of the long hedge strategy, complete the transactions in the futures and cash markets. Futures Market Net gain or loss in the futures market: $259,000 -$629,000 $947,000 - $ 148,000 Cash Market Net gain or loss in the cash market: $318,000 - $740,000 -$148,000 $888,000 Thus, the gain and loss offset each other, and the company benefits from placing the long hedge. The company earns a net profit of and helps protect the producer to purchase a commodity against rising prices