Which statement describes the risk to the producer under an options contract?

• A. The producer must set aside the agreed volume; retailer may decide to take it; risk of unsold stock.
• B. The retailer bears all risk and must cover price.
• C. Options contracts guarantee profits for the producer.
• D. Options contracts are used only for currency hedging.

Answer: (A)

The situation tested is that when a producer sells an option, they take on delivery risk. The option gives the retailer the right to buy a defined volume at a fixed price. If the option is exercised, the producer must deliver that volume, which often means the producer has to earmark or set aside the contracted quantity in advance. That can tie up stock and create storage or carrying costs, and if the retailer chooses to exercise, the producer might have to sell at the strike price even if market prices would have been higher. If the option isn’t exercised, the producer still bears the risk of holding unsold stock for a period, despite having earned the option premium. This combination of potential delivery obligation and the possibility of holding inventory is the core risk for the producer.

The other statements don’t fit because an option writer does not transfer all risk to the retailer, it does not guarantee profits for the producer, and options are used for hedging more broadly than just currency, including commodity price risk.