I Question 9 1 out of 1 point In six months, a cereal company plans to sell 10,0

Question

I Question 9 1 out of 1 point In six months, a cereal company plans to sell 10,000 boxes of "Corn Crisps" for $2.00 per d 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 S with a strike price of $3.50 per bushel. What total profit would the company earn if the market price of corn in six months is $2.90, $3.30, $3.70, and $4.10, respectively? Selected Answer:c 0.47 Answers: a. $450; $450; $450; $450 b. $3,991; $3,991; $2,991; $991 $2,009; $9; $-991;$-991 d. $4,500; $2,500; $500; $-1,500 e. $1,546; $1,546; $-454; $-454

Explanation / Answer

Statement showing profit /loss

Price as at expiry Particulars 2.90 3.3 3.7 4.1 Call option with strike price of $3.5 Not exercised Not exercised exercised exercised Profit on exercise of put option 0.00 0.00 0.20 0.60 Premium paid 0.47 0.47 0.47 0.47 Profit/loss per bushel -0.47 -0.47 -0.27 0.13 Total bushel 5000.00 5000.00 5000.00 5000.00 Total Profit/loss -2350.00 -2350.00 -1350.00 650.00 LESS: interest loss[(5000*0.47)*6%) 141 141 141 141 Net profit/loss in option market -2491.00 -2491.00 -1491.00 509.00 Add:Selling of box(10000*2) 20000 20000 20000 20000 Less: cost of bushel ( 5000* price at expiry) 14500 16500 18500 20500 Non corn cost 1000.00 1000.00 1000.00 1000.00 Total 2009.00 9.00 -991.00 -991.00

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