9. Hedging strategy to protect against rising prices Aa Aa E 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 Wavy Wheat Inc., a flour manufacturer: In May, Wavy 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. 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, Wavy Wheat buys 20 future contracts. In September, the spot price of wheat rose to $8.70 per bushel. Based on your understanding of the long hedge strategy, complete the following: Net Cost of Wheat (including gain or loss on futures) Gain or Loss on Futures Contracts $870,000 $616,000 $1,124,000 $254,000 $254,000 -$145,000 $928,000 -$616,000 O