Ch 24: Assignment - Enterprise Risk Management Back to Assignment Attempts: Average: 2 Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more. 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 Green Harvest Inc., a flour manufacturer: In May, Green Harvest 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 $5.59 per bushel, and the September futures price of the commodity is $6.33 per bushel. At $6.33 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, Green Harvest buys 20 future contracts. In September, the spot price of wheat rose to $8.94 per bushel. Based on your understanding of the long hedge strategy, complete the following: Gain or Loss on Futures Contracts Net Cost of Wheat (including gain or loss on futures) 0 -$149,000 - $633,000 $261,000 $954,000 $261,000 $894,000 $1,155,000 $633,000 0