Information for Problems 6 through 10: Hedging a Commodity Purchase Using Options On March 17, 2021 the managers of Golden Mountain Flour and Meal (GMFM) are engaged in production planning for their popular line of corn flour and corn meal. In addition to supplying multiple grocery store chains, GMFM also functions as a bulk supplier to several baked goods manufacturers. Supply contracts are established in advance with prices fixed for the duration of these contract. GMFM has recently entered into multiple supply contracts which will be profitable if the price of corn remains at current levels or declines. The management team's analysis of anticipated spring corn plantings suggests that corn prices should decline in the coming months. However, recent agricultural commodity market volatility gives the team reason for concern. To manage the risk of rising corn prices, while still allowing for the possibility of capturing gains from the in-house forecasts of falling prices, the team decides to hedge their input price risk using corn futures options. (Futures options are options written on futures contracts which give a position in the associated futures contract if exercised. If the futures contract is immediately closed out when the option is exercised, the futures option behaves essentially the same as an option on the spot price. See textbook p. 345.) The management team must buy 100,000 bushels of corn on May 15th in order to meet production needs for pending deliveries. The team decides to use the June 2021 futures options which trade through May 21, 2021. An at-the-money call option with a strike price of 530 cents per bushel and a premium per unit of 30 cents is selected. It is noted that each futures option contract covers 5,000 bushels. Construct an excel spreadsheet demonstrating on a per bushel basis 1) the spot purchase cash flow, 2) the option payoff cash flow, and 3) the net hedged cash flow. Within the spreadsheet create a graph showing all three cashflows as a function as a function of the unknown future price on May 15th. For the purpose of this exercise assume there is no basis risk. 6. What is the largest negative cash flow which the firm will face per bushel once the hedge is in place? If your answer is a specific value, enter your answer on a per bushel basis rounded to dollars and cents. (ex. $12.4512 should be entered as "12.45") Answer: 7. What is the lowest per bushel ending price at which the firm would be exercising the futures option as part of the hedge strategy? Enter your answer on a per bushel basis rounded to dollars and cents. If the corn price in question were 5.12, then enter the price as "5.12". Answer: 8. What is the value of the vertical intercept of the graph of the net hedged cash flow function? If this is a cash outflow, be sure to include the negative sign to indicate the direction of the flow. Note this is on a per bushel basis. Answer: 9. If the price of corn is 625 cents per bushel on March 15, what would be the firm's total net cash flow to acquire the entire required 100,000 bushels of corn? Note that this is the cash flow for the entire purchase. Enter your answer in dollars and cents using a negative sign to indicate a cash outflow. a Answer: 10. In question nine, would the firm be exercising the option or allowing it to expire? Select one: a. There isn't enough information given in the question to determine whether the option would be exercised or not. O b. The option would be allowed to expire. O c. The option would be exercised. Information for Problems 6 through 10: Hedging a Commodity Purchase Using Options On March 17, 2021 the managers of Golden Mountain Flour and Meal (GMFM) are engaged in production planning for their popular line of corn flour and corn meal. In addition to supplying multiple grocery store chains, GMFM also functions as a bulk supplier to several baked goods manufacturers. Supply contracts are established in advance with prices fixed for the duration of these contract. GMFM has recently entered into multiple supply contracts which will be profitable if the price of corn remains at current levels or declines. The management team's analysis of anticipated spring corn plantings suggests that corn prices should decline in the coming months. However, recent agricultural commodity market volatility gives the team reason for concern. To manage the risk of rising corn prices, while still allowing for the possibility of capturing gains from the in-house forecasts of falling prices, the team decides to hedge their input price risk using corn futures options. (Futures options are options written on futures contracts which give a position in the associated futures contract if exercised. If the futures contract is immediately closed out when the option is exercised, the futures option behaves essentially the same as an option on the spot price. See textbook p. 345.) The management team must buy 100,000 bushels of corn on May 15th in order to meet production needs for pending deliveries. The team decides to use the June 2021 futures options which trade through May 21, 2021. An at-the-money call option with a strike price of 530 cents per bushel and a premium per unit of 30 cents is selected. It is noted that each futures option contract covers 5,000 bushels. Construct an excel spreadsheet demonstrating on a per bushel basis 1) the spot purchase cash flow, 2) the option payoff cash flow, and 3) the net hedged cash flow. Within the spreadsheet create a graph showing all three cashflows as a function as a function of the unknown future price on May 15th. For the purpose of this exercise assume there is no basis risk. 6. What is the largest negative cash flow which the firm will face per bushel once the hedge is in place? If your answer is a specific value, enter your answer on a per bushel basis rounded to dollars and cents. (ex. $12.4512 should be entered as "12.45") Answer: 7. What is the lowest per bushel ending price at which the firm would be exercising the futures option as part of the hedge strategy? Enter your answer on a per bushel basis rounded to dollars and cents. If the corn price in question were 5.12, then enter the price as "5.12". Answer: 8. What is the value of the vertical intercept of the graph of the net hedged cash flow function? If this is a cash outflow, be sure to include the negative sign to indicate the direction of the flow. Note this is on a per bushel basis. Answer: 9. If the price of corn is 625 cents per bushel on March 15, what would be the firm's total net cash flow to acquire the entire required 100,000 bushels of corn? Note that this is the cash flow for the entire purchase. Enter your answer in dollars and cents using a negative sign to indicate a cash outflow. a Answer: 10. In question nine, would the firm be exercising the option or allowing it to expire? Select one: a. There isn't enough information given in the question to determine whether the option would be exercised or not. O b. The option would be allowed to expire. O c. The option would be exercised