Flour Millers Ltd (FML) needs to acquire 35,000 bushels (approximately 100,000 kg) of wheat every quarter. The spot price of wheat is currently $8.50 per bushel but is expected to increase. FML is able to purchase call options on wheat (each contract is for 5,000 bushels) with a strike price of $8.50 per bushel and an option premium of $0.50 per bushel. Calculate total expected savings from purchasing the options if FML expects wheat to sell at $10.00 per bushel in 3 months. Conversely, how much did it cost FML to hedge if the wheat price is unchanged in 3 months?

Flour Millers Ltd (FML) needs to acquire 35,000 bushels (approximately 100,000 kg) of wheat every quarter. The spot price of wheat is currently $8.50 per bushel but is expected to increase. FML is able to purchase call options on wheat (each contract is for 5,000 bushels) with a strike price of $8.50 per bushel and an option premium of $0.50 per bushel. Calculate total expected savings from purchasing the options if FML expects wheat to sell at $10.00 per bushel in 3 months. Conversely, how much did it cost FML to hedge if the wheat price is unchanged in 3 months?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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pm.3
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