A Company Is Considering Using Futures Contracts to Hedge an Identified

question 22

Multiple Choice

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However, it is concerned about the impact of basis risk.All of the following statements regarding basis risk are correct, except:

• A)basis risk is the difference between prices in the physical market and the price of the relevant futures market contract.
• B)the existence of basis risk removes the opportunity for a perfect borrowing hedge.
• C)initial basis will be evident while the market is of the view that physical market prices will remain stable.
• D)final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product.

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Definitions:

Time-Driven Activity-Based Costing

A costing method that assigns costs based on the actual duration of activities rather than on estimated overhead rates.

Customer Support Department

A functional unit within an organization tasked with providing assistance and guidance to customers before, during, and after a purchase.

Matching Capacity

The process of aligning a company's production capability with the demand for its products to optimize efficiency and minimize costs.

Impact on Expenses

The effect that a specific action or decision has on a company's total expenses.