In six months, a cereal company plans to sell 30,000 boxes of “Corn Crisps” for

Question

In six months, a cereal company plans to sell 30,000 boxes of “Corn Crisps” for $4.00 per box and will need to buy 15,000 bushels of corn to do so. In doing so, it also incurs non-corn costs of $38,000. The current spot price of corn is $5.10 per bushel, and the effective six-month interest rate is 3 percent. The company will hedge by selling a collar -- i.e., purchasing $5.30-strike call options at $0.37 per bushel and writing $4.90-strike put options at $0.23. What total profit would be earned if the market price of corn in six months is $4.50, $4.90, $5.30, and $5.70, respectively?

Explanation / Answer

Statement showing profit /loss on call option

Statement showing profit /loss on Put option

Statement showing Profit/loss

Price as at expiry Particulars 4.50 4.9 5.3 5.7 Whether to exercise call option @ 5.3 strike price NO NO NO Yes Profit 0 0 0 0.4 Premium paid 0.37 0.37 0.37 0.37 Profit/loss per bushel -0.37 -0.37 -0.37 0.03 No of bushel 15000 15000 15000 15000 Profit/loss -5550 -5550 -5550 450 interest lost ( 15000*0.37) * 0.03 166.5 166.5 166.5 166.5 Total profit/loss on call option -5716.5 -5716.5 -5716.5 283.5

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