A manufacturer of breakfast cereal is concerned about corn prices.The firm anticipates needing 1 million bushels of corn in one month.The current price of corn is $6.50 per bushel and the futures price for delivery in one month is $7.00 per bushel.The cost to store the corn for 1 month is $100,000.What should the firm do?
A)Hedge with futures for a total cost of $7,000,000.
B)Hedge with futures for a total cost of $6,900,000.
C)Buy the corn now and store for 1 month,for a total cost of $6,500,000.
D)Buy the corn now and store for 1 month,for a total cost of $6,600,000.
E)Wait one month and buy the corn at the market price in one month.

Question

Quizplus · Accepted Answer

Buying the corn now at $6.50 per bushel for 1 million bushels would cost $6,500,000. Adding the storage cost of $100,000 gives a total cost of $6,600,000.

A Manufacturer of Breakfast Cereal Is Concerned About Corn Prices