Question

In six months, a cereal company plans to sell 40,000 boxes of “Corn Crisps” for $4.50 per box and will need to buy 20,000 bushels of corn to do so. In doing so, it also incurs non-corn costs of $79,000. The current spot price of corn is $4.50 per bushel, and the six-month forward price is $4.64. Assuming the company remains unhedged, what total profit would it earn if the market price of corn in six months is $3.90, $4.30, $4.70, and $5.10, respectively?

Answer #1

Profit of the company if the company is remain unhedged -

Particulars |
Price of Corn $ 3.9 |
Price of Corn $ 4.3 |
Price of Corn $ 4.7 |
Price of Corn $ 5.1 |

Sales of Boxes(40000 x 4.50) |
180000 |
180000 |
180000 |
180000 |

Cost of Bushels of Corn |
78000 |
86000 |
94000 |
102000 |

non -Corn Costs |
79000 |
79000 |
79000 |
79000 |

Profit |
23000 |
15000 |
7000 |
-1000 |

Profit of the Company after hedging -

Particulars |
If Company is hedged |

Sales of Boxes(40000 x 4.50) |
180000 |

Cost of Bushels of Corn |
92800 |

non -Corn Costs |
79000 |

Profit |
8200 |

In six months, a cereal company plans to sell 20,000 boxes of
“Corn Crisps” for $4.00 per box and will need to buy 10,000 bushels
of corn to do so. In doing so, it also incurs non-corn costs of
$33,000. The current spot price of corn is $4.30 per bushel, and
the effective six-month interest rate is 4 percent. The company
will hedge by purchasing call options at $0.57 with a strike price
of $4.20 per bushel. What total profit...

In six months, a cereal company plans to sell 10,000 boxes of
“Corn Crisps” for $2.00 per box and will need to buy 5,000 bushels
of corn to do so. In doing so, it also incurs non-corn costs of
$1,000. The current spot price of corn is $3.50 per bushel, and the
effective six-month interest rate is 6 percent. The company will
hedge by purchasing call options at $0.47 with a strike price of
$3.50 per bushel. What total profit...

In six months, a cereal company plans to sell 20,000 boxes of
"Com Crisps" for $4.00 per box and will need to buy 10,000 bushels
of com to do so. In doing so, it also incurs non-com costs of
$30,000. The current spot price of com is $4.70 per bushel, and the
effective six-month interest rate is 3 percent. The company will
hedge by purchasing call options at $0.62 with a strike price of
$4.70 per bushel. What total profit...

Six months from now, Farmer Larry will harvest 25,000 bushels of
corn. In doing so, he incurs costs of $111,000. The current spot
price of corn is $4.90 per bushel, and the six-month forward price
is $5.05. Suppose Larry decides to sell corn forward. What total
profit would he earn if the market price of corn at harvest time is
$4.30, $4.70, $5.10, and $5.50, respectively?
show all steps

Six months from now, Farmer Mike will harvest 25,000 bushels of
com. In doing so, he incurs costs of $136,000. The current spot
price of com is $5.90 per bushel, and the effective six-month
interest rate is 6 percent. Mike has decided to hedge with a collar
by purchasing $5.70-strike puts and selling $6.10-strike calls on
25,000 bushels of com. The puts have a premium of $0.47 per bushel,
while the calls have a premium of $0.8 per bushel. What...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 8 minutes ago

asked 14 minutes ago

asked 19 minutes ago

asked 26 minutes ago

asked 31 minutes ago

asked 43 minutes ago

asked 44 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago