A manufacturer of breakfast cereal is concerned about corn prices. The firm anticipates needing 1 million...
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. Calculate the total cost of corn using both hedging and non-hedging methods.
Homework Answers
WITH HEDGING
The total cost is no. of bushels * future price = 1million * 7=$7 million
WITH NON HEDGING
Total cost = current price* no of bushels + storage cost
= 6.5 *1 million + 0.1 million
=$6.6 million
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