How Might a Firm Such as General Mills Use Options

question 45

Multiple Choice

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

• A) Buy call options on commodities
• B) Sell call options on commodities
• C) Buy put options on commodities
• D)Sell put options on commodities

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Definitions:

Compounded Semi-Annually

This is the process where interest is added to the principal sum of a loan or deposit twice a year, resulting in interest being earned on interest from that point on.

Replacement Stream

A series of cash flows intended to replace the benefits of an asset or investment over time.

Payments

Payments refer to the amounts of money transferred from one party to another as compensation for goods or services, or as fulfillment of an obligation.

Compounded Quarterly

The process where interest is added to the principal sum of a loan or deposit four times a year, resulting in a higher amount of interest being accumulated than if compounded less frequently.