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Hedge against the prospect of higher corn prices

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Poppy Popcorn is a company that produces popcorn balls for Halloween. The company has determined that their profits per bushel of corn is given by the quation:

P(X) = 20.00 - 5X, where X is the price of corn per bushel six months from today.

To hedge against the prospect of higher corn prices, the company purchases 5 call options on corn with a strike price of $3.75 and a cost of $0.14703 (all dollar calues are per bushel).

The annual continuously compunded risk-free rate is 4%.

a.) Calculate the company's after hedge profits per bushel of corn if the actual price of corn in six months is $3.50 per bushel.

b.) Calculate the company's after hedge profits per bushel of corn if the actual price of corn in six months is $4.00 per bushel.

Reference no: EM131893872

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