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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Your storage firm has been offered $95,400 in one year to store some goods for one year. Assume your costs are $96,700, payable immediately, and the cost of capital is 8.4%. Should you take the contract? The NPV Will Be $______ (Round to the nearest cent)
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Your firm needs to purchase 1,200 traffic cones from a supplier. One supplier demands apayment of $1,000.00 today plus $10.59 per cone payable in one year. Another supplier willask for no payment today and $11.59 per cone, also payable in one year. If the discountrate is 8.200% per year compounded annually, how much does your firm save (in terms oftoday’s dollars) by taking the less expensive offer compared to the more expensive offer?
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Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be$5.01milion per year. Your upfront selup costs to be ready to produce the part would be$7.97million. Your discount rate for this contract is8.1%. a. What is the IRR? b. The NPV is$4.92million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?

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