Hershey's Chocolate Is Concerned About Cocoa Prices Prior to Building

question 109

Multiple Choice

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

• A)Cocoa prices will rise to $1,500 and Hershey is only protected to a price of $1,300.
• B)Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton.
• C)Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium.
• D)Cocoa Prices will remain below $1,300 and Hershey will lose $145 per option contract.

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Definitions:

Journalizing

The process of recording transactions in a journal or diary in chronological order before they are posted to ledgers.

Post Reference Notation

A notation in a ledger to indicate the source of each entry, facilitating the traceability and verification of transactions.

Ledger

A book or electronic record used to record all of a company's financial transactions in accounts.

Ledger

A book or collection of financial accounts where transactions are recorded, typically categorized by type.