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?

Answer 1

Statement showing profit /loss on call option

	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

Statement showing profit /loss on Put option

	Price as at expiry
Particulars	4.50	4.9	5.3	5.7
Whether to put option with strike price of 4.9 will be exercised	Yes	NO	NO	NO
Profit	-0.40	0.00	0.00	0.00
Premium received	0.23	0.23	0.23	0.23
Profit/loss per bushel	-0.17	0.23	0.23	0.23
No of bushel	15000	15000	15000	15000
Profit/loss	-2550	3450	3450	3450
interest received ( 15000*0.23) * 0.03	103.5	103.5	103.5	103.5
Total profit/loss on put option	-2446.5	3553.5	3553.5	3553.5

Statement showing Profit/loss

	Price as at expiry
Particulars	4.50	4.9	5.3	5.7
Selling price of Corn Crips(30000*4)	120000	120000	120000	120000
Less: cost of bushel of corn(15000* Price as at expiry)	67500.00	73500.00	79500.00	85500.00
Non corn cost	38000.00	38000.00	38000.00	38000.00
Profit/loss in cash market	14500.00	8500.00	2500.00	-3500.00
Total profit/loss on call option	-5716.5	-5716.5	-5716.5	283.5
Net profit/loss on put option	-2446.5	3553.5	3553.5	3553.5
Total profit/loss	6337	6337	337	337