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.
cost Happy Jalapenos 1,000 to provide 10,000 jalapenos and today’s 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,
Buy 10,000 0.12-strike put options for 84.30 and sell 10,000 0.14-stike call options for
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?
–200 to 100
–110 to 190
–100 to 200
190 to 390
200 to 400
Zero-coupon risk-free bonds are available with the following maturities and yield rates
You need to buy corn for producing ethanol. You want to purchase 10,000 bushels one
year from now, 15,000 bushels two years from now, and 20,000 bushels three years
The current forward prices, per bushel, are 3.89, 4.11, and 4.16 for one,
two, and three years respectively.
You want to enter into a commodity swap to lock in these prices.
Which of the
following sequences of payments at times one, two, and three will NOT be acceptable
to you and to the corn supplier?
38,900, 61,650, 83,200
39,083, 61,650, 82,039
40,777, 61,166, 81,554
41,892, 62,340, 78,997
60,184, 60,184, 60,184