SugarCube PLC, the most important sugar company in Brazil is expecting to harvest 1700 tonnes of sugar in June 2023. Although the price of sugar has been quite stable recently, SugarCube PLC is aware that most sugar farms around the world will have a better than expected harvest this year and the sugar price is quite likely to decrease.

SugarCube PLC expects the price to decrease from the current November 2022 price of 155/tonne to around 120/tonne by June 2023.

June 2023 sugar futures contracts are currently priced at 148/tonne. Each contract is based on 100 tonnes of sugar and the initial margin is 7.5%. The round-trip commission is 60/contract.

1.Considering the information above, what would be a good hedging strategy SugarCube PLC could follow to lock in the sugar price at 148/tonne? Show detailed steps and calculation. What is the margin SugarCube PLC would have to deposit?

2.Show SugarCube PLCs position at harvest in June 2023 if the sugar price reaches the level of 187/tonne (assume futures price follows the spot price) and the company actually harvests 1800 tonnes of sugar. Detailed calculations are expected.