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.

Question

Quizplus · Accepted Answer

Hershey's worst-case scenario is if cocoa prices remain below the $1,300 strike price, as they will not exercise the option and will lose the entire premium paid, which is $145 per option contract.

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