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