As We Saw in the Chapter, Some Financial Instruments Are

question 68

Essay

As we saw in the chapter, some financial instruments are used primarily to transfer risk.Explain how a bread maker can use a financial instrument to transfer the following risk: The bread maker has the opportunity to provide bread to a local army base.The base figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year.The problem is the baker must quote a price for the entire year.The baker would really like to have this contract but he realizes that fluctuating input prices (specifically wheat) could result in significant losses.

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Definitions:

Cost Standards

Predetermined costs that serve as a benchmark for evaluating the actual performance and budgeting of a company.

Past Cost Data

Historical financial information on the costs associated with production, operations, or projects, used for planning and analysis.

Technology

The application of scientific knowledge for practical purposes, especially in industry.

Production Methods

Various techniques and processes used in the creation of goods and services, ranging from manual labor to advanced manufacturing technologies.