6) Prairie Beer Brewing (PBB) is a company that supplies beer to restaurants in Western Canada....

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6) Prairie Beer Brewing (PBB) is a company that supplies beer to restaurants in Western Canada. Today, PBB signed a contract to deliver in 9 months (end of January 2022) 40,000 units at the price of $20 per unit (a unit contain several litres of beer). Other production expenses are estimated at $620,000. Each unit of output will need a unit of grain (several Kgs). PBB needs the grain in August 2021 when the production starts. Upon further analysis, you learn the following about the current and forward prices of wheat: Time 0 (Current) Spot (cash price of wheat) = $4 per unit Forward price of wheat for delivery in August 2021 = $4.15 per unit Forecast of prices in August 2021 State of the Economy Probability Excellent 25% Normal Poor 50% 25% Price of Wheat $4.60 $4.10 $3.50 a) Assuming PBB does not hedge, what are the profits to PBB under each of the price scenarios expected in August 2021? Hint: Fill the following table (add or ignore columns or rows if needed) (4 marks) b) PBB's management is considering the possibility of hedging the price of grain using a forward contract to buy 40,000 units of grain for August 2021 delivery. For each of the states of the economy, calculate the cash flows of PBB from the forward position? (3 marks) 6) Prairie Beer Brewing (PBB) is a company that supplies beer to restaurants in Western Canada. Today, PBB signed a contract to deliver in 9 months (end of January 2022) 40,000 units at the price of $20 per unit (a unit contain several litres of beer). Other production expenses are estimated at $620,000. Each unit of output will need a unit of grain (several Kgs). PBB needs the grain in August 2021 when the production starts. Upon further analysis, you learn the following about the current and forward prices of wheat: Time 0 (Current) Spot (cash price of wheat) = $4 per unit Forward price of wheat for delivery in August 2021 = $4.15 per unit Forecast of prices in August 2021 State of the Economy Probability Excellent 25% Normal Poor 50% 25% Price of Wheat $4.60 $4.10 $3.50 a) Assuming PBB does not hedge, what are the profits to PBB under each of the price scenarios expected in August 2021? Hint: Fill the following table (add or ignore columns or rows if needed) (4 marks) b) PBB's management is considering the possibility of hedging the price of grain using a forward contract to buy 40,000 units of grain for August 2021 delivery. For each of the states of the economy, calculate the cash flows of PBB from the forward position? (3 marks)

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a Profits to PBB under each price scenario expected in August 2021 State of the Economy Probability ... View the full answer