Question

4) 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 $83,000. The current spot price of corn is $4.50 per bushel, and the effective six-month interest rate is 5 percent. The company will hedge by selling a collar -- i.e., purchasing $4.70-strike call options at $0.47 per bushel and writing $4.30-strike put options at $0.27. What total profit would be earned if the market price of corn in six months is $3.90, $4.30, $4.70, and $5.10, respectively?

a) $2,400; $2,400; $2,400; $2,400

b) $7,240; $–760; $–4,760; $–4,760

c) $19,000; $11,000; $3,000; $–5,000

d) $18,760; $18,760; $14,760; $6,760

e) $6,800; $6,800; $–1,200; $–1,200

Answer 1