This problem has two parts: a) and b), which are indpendent of each other.

a) You're long both a put option, and a call option on Rockwood stock with the same expiration date. The exercise price of the call option is $40 while the exercise price of the put option is $30. Graph the payoff of the combination of options at expiration.

b) Describe & graph how a oil producer can fully hedge against its output (i.e. crude oil) price risk using futures contracts (that is, a long or short position) and using options (that is, a long position in calls / puts).

(Hint: You will need to draw and explain the risk profile for the producer (and what will be its desired risk profile), and please combine with certain payoff profiles for some specific positions in options and futures to illustrate how each specific hedging strategy works, that is, as the result of using futures or options, the producer will achieve the desired risk profile.)