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

Question

Quizplus · Accepted Answer

By purchasing a call option on the raw material, the firm can protect against an increase in price. If the price does increase, they can exercise the option to buy the raw material at the lower, predetermined price. If the price decreases, the firm can benefit from paying the lower market price for the raw material instead of exercising the option.

By Using Options a Firm Can Protect Against Increase in Raw