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. Based on the selling price that wavy Wheat 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, Wavy Wheat 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 Net gain or loss in the futures market: $947,000 0 -5629,000 O $259,000 O $148,000 Cash Market Net gain or loss in the cash market: 0 - $740,000 O $888,000 O $318,000 0 $148,000 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