ExpertMedium1 markMultiple Choice
CPA · Question 14 · Area I: Business Analysis
A US-based airline expects to purchase 1 million gallons of jet fuel in 3 months. The company is concerned that fuel prices will rise. To hedge this risk, the company should:
A US-based airline expects to purchase 1 million gallons of jet fuel in 3 months. The company is concerned that fuel prices will rise. To hedge this risk, the company should:
Answer options:
A.
Sell jet fuel futures contracts.
B.
Buy jet fuel futures contracts.
C.
Buy put options on jet fuel.
D.
Do nothing, as fuel prices are cyclical.
How to approach this question
Identify the risk exposure: Risk is price rising. Identify the position: Need to buy asset. Hedge: Take a Long position (Buy futures or Call options).
Full Answer
B.Buy jet fuel futures contracts.✓ Correct
B
The airline is exposed to the risk of rising prices (input cost). To hedge this, it should take a 'long' position in futures. If prices rise, the profit on the futures contract will offset the increased cash cost of purchasing the fuel.
Common mistakes
Confusing buy/sell positions; confusing call/put options.
Practice the full CPA BAR Practice Exam 4
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the...HardQ02A company is analyzing its gross margin variance. The budgeted data for the quarter indicated sal...MediumQ03TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Inter...HardQ04Manufacturing Corp. uses Activity-Based Costing (ABC). The company has identified two cost pools:...MediumQ05During the current month, a company purchased 20,000 pounds of raw material for $42,000. The stan...Medium