Miller Brewing has just signed a special contract with sports arena's across the country to be the
Question:
Miller Brewing has just signed a special contract with sports arena's across the country to be the sole supplier of beer to the NBA season.The pricing was very thin and the Miller executives are worried about the potential of an increase in the price of hops wiping out their profit.They need to produce 1,000,000 cases of beer at $4.00 per case.They would need 250,000 bushels of hops for their production process and it currently sells for $1.00 a bushel.Miller can buy a call option today to guarantee delivery of the 250,000 bushels at $1.05 a bushel at the beginning of the contract.The cost of the option is only $10,000 since the strike price is out of the money.Storage of the hops over the contract period would cost $5,000.When the NBA season and brewing time arrive the cost of hops has risen to $1.30 a bushel.How much money did Miller save through its hedge?