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 todays market price is 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 options for 74.80.
Happy Jalapenos believes the market price in one year will be somewhere between 0.10 and 0.15 per pepper. Which interval represents the range of possible profit one year from now for Happy Jalapenos?
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