Question: Supposed Saudi Constructioneers Ltd. (Saudico) is concerned about volatile commodity prices (e.g., metals products) and they use option contracts to alter their risks. What is

Supposed Saudi Constructioneers Ltd. (Saudico) is concerned about volatile commodity prices (e.g., metals products) and they use option contracts to alter their risks. What is the worst-case scenario for a seller of put options on Hadeed with a strike price of $2.25 per ton?

1. Losses can be unlimited if prices drop sufficiently.

2. If Hadeed prices rise above $2.25 the option premium will be lost.

3. Losses can be unlimited if prices rise sufficiently.

4. If Hadeed prices drop below $2.25 the option premium will be lost.

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