Manufacturers Who Are Concerned About Volatile Commodity Prices Often Use

question 74

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 $4.75 per bushel?

• A) If corn prices drop below $4.75 the option premium will be lost.
• B) If corn prices rise above $4.75 the option premium will be lost.
• C) Losses can be large if prices drop sufficiently.
• D)Losses can be unlimited if prices rise sufficiently.

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