Mirchi Masala has an exclusive contract to supply bananas to a restaurant. The contract states...
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Mirchi Masala has an exclusive contract to supply bananas to a restaurant.
The contract states that the restaurant will take delivery of 10,000 bananas in one year at the market price. It will cost Mirchi Masala 1,000$ to provide 10,000 bananas and todays market price is 0.12$ for one banana. The continuously compounded risk-free interest rate is 6%.
Mirchi Masala 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$. Both options are one-year European.
Mirchi Masala believes the market price in one year will be somewhere between 0.10$ and 0.15$ per banana.
Determine the maximum and minimum values of possible profit one year from now for Mirchi Masala. Need detailed explanation for your answer. Assume you borrow money for option premium.
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