Consolidated Bakeries Needs to Acquire 100,000 Bushels of Wheat Each

question 46

Essay

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter. The spot price is $6.75 per bushel but is expected to increase. Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $6.80 per bushel and a premium of $0.03 per bushel. Calculate total expected savings from purchasing the options if wheat is forecasted to sell at $6.90 per bushel in 3 months. Conversely, how much did it cost to hedge if the wheat price is unchanged in 3 months?

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Definitions:

Mortgage Debt

The amount of money a borrower owes to a lender, secured by real property through a mortgage agreement.

Law of Conveyancing

A body of law pertaining to the transfer of ownership of property rights from one person to another.

Marketable Title

A clear title to real estate that is free from any significant liens or encumbrances, making it readily sellable.

Warranty Deed

A legal document in real estate transactions that guarantees the seller holds clear title to the property and has the right to sell it.