You have an exclusive contract to supply oranges to Juice&Co. and you are expected to deliver 10,000 oranges in one year from now at the market price in place at that time. Your production cost to farm and harvest the 10,000 oranges will be $2,000 in one year. Today'smarket price for one orange is $0.52. Assume that the continuously compounded risk free interest rate is 6%.

You expect the price of oranges to be between $0.50 and $0.55 next year, and you have decided to hedge your risk using one year European options: you buy 10,000 put options with strike price $0.52 for $84 (per option) and sell 10,000 call options with strike price $0.54 for $74 (per option).

A) What is the total cost of your options portfolio?

B) Determine the range of possible net profits you can get from your supply contract and options portfolio one year from now.  

Answer rating: 100% (QA)

A To calculate the total cost of your options portfolio you need to consider the cost of buying put options and selling call options Cost of buying pu... View the full answer