Suppose a candy maker anticipates buying 112,000 pounds of sugar on September 30, 2016. The October 2016 sugar futures contract’s last trading day is September 30, 2016, and it currently trades at 16.03 cents per pound (NOTE: one sugar futures contract has an underlying of 112,000 pounds of sugar). Suppose that the spot price of sugar is currently 15.43 cents per pound. Please assume that the candy maker hedges against its price risk as of the date associated with the prices above, and answer the following:
a. Please identify the direction of the candy maker’s unhedged exposure to sugar prices.
b. What trade (involving a futures contract) will the candy maker pursue to hedge against its sugar price exposure?
c. Please show the profit/(loss) expected on the candy maker’s hedge?