9. 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. In May, Red Wheat 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 Red Wheat earns from its customers, the maximum price that it can pay for wheat is $7.25 per bushel to break even. You also have the following information and assumptions: - The current spot price of wheat is $5.44 per bushel, and the September futures price of the commodity is $6.16 per bushel. - At $6.16 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, Red Wheat buys 20 future contracts. - In September, the spot price of wheat rose to $8.70 per bushel, and the price of wheat futures rose to $9.28 per bushel. Based on your understanding of the iong hedge strategy, complete the transactions in the futures and cash markets: Futures Market Net qain or loss in the futures market: $616,000 5928,000 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: $616,000$928,000$145,000$254,000 Cash Market Net gain or loss in the cash market: $312,000$870,000$145,000$725,000 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