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

question 95

Multiple Choice

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales. Analysts project that the price per ton could vary from $2,900 to $3,100. A September call option can be purchased with a $2,950 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 $3,100 and Hershey is protected only to a price of $2,950.
• B) Cocoa prices will decline to $2,850 and Hershey will have to pay an extra $100 per ton.
• C) Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the strike price plus the option premium.
• D)Cocoa prices will fall below $2,950 and Hershey will lose $145 per option contract.

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