Question
Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to the organizers of the annual jalapeno eating contest. The contract states that the
Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to the organizers of the annual jalapeno eating contest. The contract states that the contest organizers will take delivery of 10,000 jalapenos in one year at the market price. It will cost Happy Jalapenos 1,000 to provide 10,000 jalapenos and today's market price is 0.12 for one jalapeno. The continuously compounded annual risk-free interest rate is 6%. Happy Jalapenos has decided to hedge as follows: Buy 10,000 0.12-strike put options for 84.30 and sell 10,000 0.14-strike call options for 74.80. Both options are one-year European. Happy Jalapenos believes the market price in one year will be somewhere between 0.10 and 0.15 per jalapeno. Determine which of the following intervals represents the range of possible profit one year from now for Happy Jalapenos.
A. 200 to 100
B. 110 to 190
C. 100 to 200
D. 190 to 390
E. 200 to 400
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started