The Case is this:- Grain & Fiber Foods (GFF) produces granola cereal for sale to

Question

The Case is this:-

Grain & Fiber Foods (GFF) produces granola cereal for sale to large grocery stores. As part of the production process, GFF uses large quantities of corn, oats, wheat, and soybeans. To induce local production of these grains, GFF contacts with more than 300 farmers to purchase their crops at a set price with a set delivery. A buyer representative of GFF negotiates each price with the farmer. To offset the potential swings in prices and to reduce the risk of paying a higher than market price for the grapin at the time of delivery, GFF enters several futures contracts as hedges. At the end of the year, GFF has grain inventories, purchase commitments, and some forward contracts (being used as hedges) outstanding. (Ziebart, 2002)

Guidelines on How to do this:-

Facts:
Here you present the facts of the case as given to you in complete sentences. Your citation should be for the source of the facts.

Issues:
Here you list the question(s) to be answered.

Analysis:
Here in complete sentence and paragraph format you present the applicable GAAP with respect to the issues. Your statements should be general in nature and not specific to the company you are advising. Be sure to cite your source(s) as appropriate, as least at the end of the each paragraph.

Conclusion: No Citation
Here in complete sentence and paragraph format you conclude specifically with respect to the compnay's issues. Be sure to answer each issue raised.

References:
Here you list in alphabetical order and APA format the complete references for the citations above.

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Explanation / Answer

      Hedging is a method of reducing the risk of loss caused by price fluctuation. It consists of the purchase of sale of equal quantities of the same or very similar commodities in two different markets at approximately the same time, with the expectation that a future change in price in one market will be offset by an opposite change in the other market. Example:                 One person wants to buy a car after two years, present market price of that car is $150000, he assumed after two years it will be $200000. So he went to a show room and make one agrument that is he will buy that particular car for $180000 on particular date. After two years he has to pay $180000 for this car, if that car market price is $160000 or $220000 also. For show room profit and loss depends on market price. If market price is less than $180000 he will get profit, it market price is higher than $180000 he has to bear loss.          Forward contract is one of the hedging tools. There will be only two persons buyer and seller. They will make agrument directly each other. There is no any clearing house (Stock Exchange) in between them. Coming to our problem.. GFF Company wants to purchase grains in certain future point of time. So company has to estimate what is the market price in future, and fix a price to buy. This fixed price will be lower than the estimated future market price.
Example:       One type of grains present market price is $1000 per ton, we wants to purchase after 8 months, future market price will be $1200 per ton. Company has to fix price lower than the $1200, like $1150 per ton. If in future this grain cost increased to $2000 then also we can get $1150 per ton. With this hedging we can reduce our risk to certain limit. Thank you....    

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