Hershey's Chocolate is concerned about cocoa prices,which are currently $3,000 a ton.Analysts project that the cost of cocoa purchases could vary from $2,900 to $3,100 a ton.A September call option can be purchased with a $2,950 exercise price for $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 not change from their current level and Hershey will have wasted the cost of the option.
C) Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the exercise price plus the cost of the option.
D) Cocoa prices will fall below $2,950 and Hershey will lose the $145 cost of the option.

Question

Quizplus · Accepted Answer

Hershey's worst-case scenario would be if cocoa prices fall below $2,950, in which case they would lose the $145 cost of the option. Option A is a scenario where Hershey is protected but not the worst case. Option B is a scenario where Hershey does not lose money, but it also does not protect against potential price increases. Option C is not applicable as it assumes a break-even price that is above the highest projected cost of cocoa purchases.

Hershey's Chocolate Is Concerned About Cocoa Prices,which Are Currently $3,000