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:

Prochaska and DiClemente

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