The Rio-Coffee Farm, a Brazilian coffee producer, has an exclusive contract to supply coffee beans to Seattle's Best Company (SBC). The contract states that SBC will take delivery of 1,000,000 lbs of coffee beans in one year at the market price. It will cost Rio-Coffee $1,000,000 to provide 1,000,000 lbs of beans, and today's market price is $ 1.25 per lb. Rio-Coffee has decided to hedge as follows (both options are one-year, European):
• Buy 1,000,000 $1.25-strike put options for $50,000
• Sell 1,000,000 $1.40-strike call options for $38,000
Seattle's Best believes the market price in one year will be somewhere between $1.00 and $1.50 per lb. Which interval represents the range of possible profit one year from now for Rio-Coffee? The continuously compounded risk-free interest rate is 6%.