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Question 456 - CSCP discussion

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Which of the following actions hedges against commodity price fluctuations in a supply chain?

A.
Purchase always from the lowest bidder
Answers
A.
Purchase always from the lowest bidder
B.
Increase safety stock levels
Answers
B.
Increase safety stock levels
C.
Establish an online auction site
Answers
C.
Establish an online auction site
D.
Purchase future options
Answers
D.
Purchase future options
Suggested answer: D

Explanation:

Commodity Price Fluctuations: Commodity prices can be volatile, affecting the cost structure of supply chains.

Hedging: Hedging is a risk management strategy used to offset potential losses due to price changes.

Options:

Purchase Always from the Lowest Bidder (A): This doesn't hedge against price fluctuations; it simply aims for cost minimization.

Increase Safety Stock Levels (B): This protects against stockouts but doesn't hedge against price changes.

Establish an Online Auction Site (C): This may facilitate competitive pricing but isn't a direct hedge.

Purchase Future Options (D): Futures contracts allow a company to lock in prices for commodities, thus hedging against future price fluctuations.

Conclusion: Purchasing future options is the most effective action to hedge against commodity price fluctuations by securing prices in advance.

'Financial Risk Management: Applications in Market, Credit, Asset and Liability Management, and Firmwide Risk' by Jimmy Skoglund and Wei Chen.

APICS Dictionary, 16th Edition.

asked 16/09/2024
Trang Anna
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