Construct an appropriate hedging strategy

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Suppose you are a dealer in sugar. It is now August 2021, and you are holding 300,000 kg of sugar worth $0.1500 per kg. You want to fully hedge your exposure with some sugar futures contracts expiring in January 2022. The current price of the sugar futures is $0.1600 per kg and each contract is for 60,000 kg.

(a) Construct an appropriate hedging strategy to accommodate your objective.

(b) Suppose you terminate the hedge early in the coming December. The spot price is $0.1375 per kg and the January futures price is $0.1450 per kg. Determine the outcomes of your hedging strategy in part (a).

Reference no: EM132951331

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