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...