IIA-CIA-PART2 · Question #154
An organization buys crude oil on the open market and refines it into a high-quality gasoline. The price of crude oil is extremely volatile. Which of the following is the most appropriate risk…
The correct answer is C. Purchase crude oil-related derivatives such as futures or options. To manage the risk associated with volatile crude oil prices, purchasing crude oil-related derivatives such as futures or options is an appropriate risk management technique. These financial instruments allow the organization to hedge against price fluctuations by locking in…
Question
An organization buys crude oil on the open market and refines it into a high-quality gasoline. The price of crude oil is extremely volatile. Which of the following is the most appropriate risk management technique to protect the organization against these price fluctuations?
Options
- AEnter into long-term gasoline purchase agreements with end customers.
- BTrade crude oil derivatives at financial markets in order to benefit from price fluctuations
- CPurchase crude oil-related derivatives such as futures or options
- DStock as much raw materials as possible and consider Investing into additional facilities
How the community answered
(40 responses)- A8% (3)
- B3% (1)
- C75% (30)
- D15% (6)
Explanation
To manage the risk associated with volatile crude oil prices, purchasing crude oil-related derivatives such as futures or options is an appropriate risk management technique. These financial instruments allow the organization to hedge against price fluctuations by locking in prices or securing the right to purchase at a specific price, thereby providing financial stability and predictability. Option A is not directly related to hedging crude oil price risks. Option B involves speculative trading, which can be risky. Option D may not be feasible or cost-effective compared to using derivatives.
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