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:

APR

Annual Percentage Rate; a measure of the cost of credit, expressed as a yearly interest rate.

Rate of Compounding

The rate at which an investment grows due to compounding, where interest earns interest over periods.

Discount Rate

The interest rate charged to commercial banks and other financial institutions for loans received from a country's central bank.

Present Value

The present worth of a future sum of money or series of cash flows, based on a given return rate.