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Krusty Burger requires pork for producing its famous Meat-Flavored Sandwich. Frozen Pork Bellies ...

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Krusty Burger requires pork for producing its famous Meat-Flavored Sandwich. Frozen Pork Bellies ...

Krusty Burger requires pork for producing its famous Meat-Flavored Sandwich. Frozen Pork Bellies futures contracts trade on the CME. Each contract calls for the delivery of 40,000 lbs. of USDA-inspected Pork Bellies. Krusty requires 40,000lbs on July 10. Today the spot price of pork bellies is $1.177 per pound and the July futures contract is trading for a price of $1.2055/lbs. Assume Krusty enters the appropriate position in July futures contracts to hedge its price risk. On July 10th it buys its pork from local pig farmers at $1.1655/lbs. and closes out the futures position. Unfortunately, the pork bellies futures price had not achieved convergence on the day the position is closed-the futures price is $1.1700 when Krusty Burger closes its position. What is the cost per pound of pork? The purchase cost includes the cumulative profit from the futures transactions.

▸ $1.1255

▸ $1.1655

▸ $1.1770

▸ $1.2010

Textbook

Corporate Finance Online

Edition: 2^nd

Authors: Eakins, McNally

Read 56 times

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