I out of I points In six months, a cereal company plans to sell 40,000 boxes of
ID: 2617359 • Letter: I
Question
I out of I points In six months, a cereal company plans to sell 40,000 boxes of "Wheat Crisps" for $4.50 per box and will need to buy 20,000 bushels of wheat to do so. In doing so, it also incurs non- wheat costs of $9,000. The current spot price of wheat is $8.10 per bushel, and the effective six-month interest rate is 6 percent. The company will hedge by selling a collar -i.e. purchasing $8.30-strike call options at $0.85 per bushel and writing $7.90-strike put options at $0.41. What total profit would be earned if the market price of wheat in six months is $7.50, $7.90, $8.30, and $8.70, respectively? Selected Answer: a $3,672; $3,672; S-4,328; $-4,328 Answers: $860; $-7,140; $-11,140; $-11,140 S-800; S-800; $-800; $-800 $21,000; $13,000; $5,000; S-3,000 S29,140; $29,140; $25,140; $17,140Explanation / Answer
Statement showing profit/loss on call option
Statement showing profit/loss on put option
Statement showing profit/ loss
Price as at expiry Particulars 7.50 7.9 8.3 8.7 Call option with strike price of $8.3 Not exercised Not exercised Not exercised exercised Profit on exercise of put option 0.00 0.00 0.00 0.40 Premium paid 0.85 0.85 0.85 0.85 Profit/loss per bushel -0.85 -0.85 -0.85 -0.45 Total bushel 20000.00 20000.00 20000.00 20000.00 Total Profit/loss -17000.00 -17000.00 -17000.00 -9000.00 LESS: interest loss[(20000*0.85)*6%) 1020 1020 1020 1020 Net profit/loss on call option -18020.00 -18020.00 -18020.00 -10020.00