Shank Company manufactures candy. On September 1, Shank purchased a futures contract that obligates it to sell 150,000 pounds of sugar on September 30 at $0.41 per pound. Shank typically purchases 150,000 pounds of sugar per month to use as a raw material in the candy production process. It purchased the futures contract to hedge against movements in the price of sugar during the month of September.
In Shank’s case, the sugar futures contract does not hedge against movements in the price of sugar. Demonstrate this by computing the net cost of the 150,000 pounds of sugar purchased in September under three sets of circumstances, at the price per pound of $0.38, $0.41, and $0.44.