By using options a firm can protect against increases in raw material prices, while continuing to benefit from price decreases.

Question

Quizplus · Accepted Answer

By purchasing call options on the raw material, a firm can protect against increases in prices. However, if prices decrease, the firm can simply choose not to exercise the option and instead purchase the raw material at the lower price. This allows the firm to benefit from price decreases, while still having protection against price increases.

By Using Options a Firm Can Protect Against Increases in Raw