You have been appointed as a consultant for Thomas Foods. Thomas Foods was incorporated in 1969. Thomas Foods sells make purchased from farmers to neighborhood grocery stores during the country. Thomas Foods has asked you to apply a hedging strategy to mitigate the risks related with any unexpected increase in price they could have to pay farmers for their harvested crops. Thomas Foods asks that you give examples of how various hedging strategies could be implemented.
The Controller of the company has no experience in this area and would require understanding the accounting treatment for whichever hedging strategy you choose. Of importance to management is how any hedging strategy would impact operating income.