If Managers Are Rational, They Will Only Hedge When They

question 73

Multiple Choice

If managers are rational, they will only hedge when they perceive that:

• A)Prices are headed in an adverse direction
• B)Derivative instruments are priced lower than actual value
• C)Risk reduction is preferable to higher potential profits
• D)They can increase their profitability by doing so

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Definitions:

Variable Manufacturing Costs

Costs of production that fluctuate with the volume of output, including expenses like raw materials and direct labor.

Variable Selling

Costs related to selling activities that vary with sales volume, distinct from fixed sales costs.

Fixed Manufacturing Overhead

Regular, unchanging costs associated with operating a manufacturing facility, excluding variable costs, such as rent, utilities, and salaries for management.

Margin of Safety

The difference between actual or expected sales and the break-even point, representing the cushion against potential losses.