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.

Question

Quizplus · Accepted Answer

For a seller of put options, the worst-case scenario occurs when the price of the underlying asset (in this case, corn) drops significantly below the strike price. This is because the seller of the put option is obligated to buy the asset at the strike price, which could be much higher than the market price, leading to large losses.

Manufacturers Who Are Concerned About Volatile Commodity Prices Often Use