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

question 14

Essay

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter.The spot price is $3.75 per bushel but is expected to increase.Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $3.80 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 $3.90 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:

Adolescence

The transitional stage of physical and psychological development that generally occurs during the period from puberty to legal adulthood.

Childhood

The period of life from birth to adolescence, characterized by growth, development, and learning.

Adulthood

The period in the human lifespan when an individual is considered to be fully developed and mature, both physically and mentally.

Narcissism

A personality trait characterized by an inflated sense of self-importance, need for admiration, and lack of empathy for others.