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 $2.25 per bushel?
A) If corn prices drop below $2.25 the option premium will be lost.
B) If corn prices rise above $2.25 the option premium will be lost.
C) Losses can be unlimited if prices drop sufficiently.
D) Losses can be unlimited if prices rise sufficiently.

Question

Quizplus · Accepted Answer

The worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel is that the prices drop below $2.25, leading to a loss of option premium. However, the potential losses can be unlimited if the prices drop significantly, making choice C the best answer.

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