what is the risk profile for a cereal maker who needs a large quantity of wheat...
what is the risk profile for a cereal maker who needs a large quantity of wheat for production process and has managed to complete hedge his/her risk exposure?
Homework Answers
Risk profile for cereal maker which has a large quantity of wheat for production process and has managed to completely hedged his risk exposure, then he would be exposed to the cost of hedging and he will also be have to let go any kind of advantages movements in the prices of wheats in his favour.
As for example, This cereal maker needs a large quantity of wheat production and he has placed order for $1000 with hedging cost of $50, so he can get the wheat at 1000. Let's see if the prices of wheat are falling constantly to $800, he will still have to purchase it at $2000 and still have to incurr cost of 50 as hedging so he will be at a loss and he will not be able to take advantage of any favourable moments on the downside so he would be exposed to the risk of losing the opportunity of exercising the purchase price at lower and always incurring a cost of hedging.
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what is the risk profile for a cereal maker who needs
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