4)Your firm is one of the largest bakery's in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input - wheat. You have determined that a price of $52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of $50/per ton expiring in 1 month:

Call options on wheat are selling at a premium of $0.87 per ton.

Put options on wheat are selling for $0.72 per ton.

a)Given the information above, will you need a call or a put option? [1 mark]

b)If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) $40 per ton and (ii) $60 per ton. [12 marks].