Manufacturers Who Are Concerned About Volatile Commodity Prices Often Use

question 7

Multiple Choice

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks.What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?

• A) If corn prices drop below $2.25 the option premium will be lost.
• B) If corn prices rise above $2.25 the option premium will be lost.
• C) Losses can be unlimited if prices drop sufficiently.
• D) Losses can be unlimited if prices rise sufficiently.

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Definitions:

Units

Represents a measure of quantity or volume, often used in production, inventory, or accounting contexts.

Manufacturing Overhead

refers to indirect factory-related costs incurred when producing a product, which can include costs related to the maintenance and operation of the factory.

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity, allowing more accurate budgeting in variable cost situations.

Units

A quantifiable measure used in manufacturing, inventory, and other sectors, referring to the individual or standardized quantity of a product or material.