please explain how to answer with formulas. Thank you. In six months, a cereal c
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please explain how to answer with formulas. Thank you.
In six months, a cereal company plans to sell 50,000 boxes of "Wheat Crisps" for $4.50 per box and will need to buy 25,000 bushels of wheat to do so. In doing so, it also incurs non-wheat costs of $58,000. The current spot price of wheat is $6.10 per bushel, and the six-month forward price is $6.47. Assuming the company remains unhedged, what total profit would it earn if the market price of wheat in six months is $5.50, $5.90, $6.30, and $6.70, respectively? Answers: a. $5,250; $5,250; $5,250; $5,250 b. $29,500; $19,500; S9,500; S-500 C. $11,215; $1,215; S-3,785; $-3,785 d. $11,020; $11,020; $1,020; $1,020 e. $32,785; $32,785; $27,785; $17,785 Question 8 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 $39,000. The current spot price of corn is $5.10 per bushel, and the six-month forward price is $5.36. The company will hedge by buying corn forward. What total profit would be earned if the market price of corn in six months is S4.50, $4.90, $5.30, and $5.70, respectively? Answers: a. $13,500; $7,500; S1,500; S 4,500 b. $4,995; $-1,005; $-4,005; $ 4,005 C. $3,878; $3,878; $-2,123; $-2,123 d. $13,005; $13,005; $10,005; $4,005 e. $600; $600; $600; $600Explanation / Answer
(1) Number of Boxes to be sold = 50000 and Price per Box = $ 4.5
Non-Corn Cost = $ 58000 and the company needs to purchase 25000 wheat bushels
If the company remains unhedged, the profit = Number of Boxes x Price per Box - Non-Corn Cost - (25000 x Price per bushel)
Therefore, when the price per bushel = $ 5.5, Profit = 50000 x 4.5 - 58000 - (25000 x 5.5) = $ 29500
Price per bushel = $ 5.9, Profit = 50000 x 4.5 - 58000 - (25000 x 5.9) = $ 19500
Price per bushel = $ 6.3, Profit = 50000 x 4.5 - 58000 - (25000 x 6.3) = $ 9500
Price per bushel = $ 6.7, Profit = 50000 x 4.5 - 58000 - (25000 x 6.7) = - $ 500
Hence, the correct option is (b).
(2) Number of Boxes = 30000, Price per Box = $ 4, Number of bushels required = 15000 and Non-Corn Cost = $ 39000
As the firm hedges by buying a forward contract with a forward price of $ 5.36 per bushel, the firm is obliged to buy corn at this price irrespective of the existing market price 6-months later, as a forward contract unlike an option is binding.
Profit = 30000 x 4 - 39000 - (15000 x 5.36) = $ 600
Hence, the correct option is (e).
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