Question
Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to theorganizers of the annual jalapeno eating contest. The contract states that the contestorganizers
Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to theorganizers of the annual jalapeno eating contest. The contract states that the contestorganizers will take delivery of 10,000 jalapenos in one year at the market price. Itwill cost Happy Jalapenos 1,000 to provide 10,000 jalapenos and todays market priceis 0.12 for one jalapeno. The continuously compounded risk-free interest rate is 6%.Happy Jalapenos has decided to hedge as follows (both options are one-year,European):Buy 10,000 0.12-strike put options for 84.30 and sell 10,000 0.14-stike call optionsfor 74.80.Happy Jalapenos believes the market price in one year will be somewhere between0.10 and 0.15 per pepper. Which interval represents the range of possible profit oneyear 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
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