On Jan. $2$ a large feed company has forward contracted a pre mixed feed for delivery on Jan. $29$ to a feed lot. The primary ingredient is corn. The cash market on corn is currently $$6\mathrm{.}00/$bu$.$ The company will not buy the corn until $2$ days before delivery of the pre$-$mix.

$1.$ Describe the feed company$$s position.

$2.$ What is the risk to the feed company?

$3.$ What kind of option contract can the feed company use to hedge its position?

Scenario A:

On Jan. $2$ the feed company buys a $$6\mathrm{.}10$ Mar Call at a premium of $$0\mathrm{.}15/$bu$.$ By Jan $27$th the cash price for corn is $$6\mathrm{.}75/$bu$.$

$1.$ What is the net cost of the corn the feed company must buy to fulfill its obligation to deliver pre$-$mix to the feed lot?

Scenario B:

On Jan. $2$ the feed company buys a $$6\mathrm{.}10$ Mar Call at a premium of $$0\mathrm{.}15/$bu$.$ By Jan $27$th the cash price for corn is $$5\mathrm{.}20/$bu$.$

$1.$ What is the net cost of the corn the feed company must buy to fulfill its obligation to deliver pre$-$mix to the feed lot?