If Managers Are Rational, They Will Hedge Only When They

question 32

Multiple Choice

If managers are rational, they will hedge only 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:

Favorable

A term used to describe outcomes or variances that are positive or beneficial to a business, such as lower costs or higher revenues than expected.

Unfavorable

A term used in budgeting and variance analysis indicating costs exceeded the budget or revenue fell short.

Variable Overhead Efficiency Variance

The difference between the expected variable overhead costs based on standard costing and the actual variable overhead incurred, attributable to efficiency.

Materials Price Variance

The difference between the actual cost of raw materials and the standard cost expected to be paid, reflecting changes in price.