KidCo Cereal Company sells "Sugar Corns" for $2.50 per box.The company will need to buy 20,000 bushels of corn in 6 months to produce 40,000 boxes of cereal.Non-corn costs total $60,000.What is the company's profit if they purchase call options at $0.12 per bushel with a strike price of $1.60? Assume the 6-month interest rate is 4.0% and the spot price in 6 months is $1.65 per bushel.
A) $6,504 profit
B) $8,005 loss
C) $12,064 profit
D) $11,293 loss

Question

Quizplus · Accepted Answer

The company will need to buy 20,000 bushels of corn in 6 months to produce 40,000 boxes of cereal. The spot price in 6 months is $1.65 per bushel. The company can buy call options at $0.12 per bushel with a strike price of $1.60. The 6-month interest rate is 4.0%.The company's profit is:Profit = (Spot price - Strike price) * Number of bushels - (Option premium * Number of bushels) - Non-corn costsProfit = ($1.65 - $1.60) * 20,000 - ($0.12 * 20,000) - $60,000Profit = $10,000The company's profit is $10,000.

KidCo Cereal Company Sells "Sugar Corns" for $2