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Question 166 - IIA-CIA-Part2 discussion

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An organization buys crude oil on the open market and refines it into a high-quality gasoline. The price of crude oil is extremely volatile. Which of the following is the most appropriate risk management technique to protect the organization against these price fluctuations?

A.
Enter into long-term gasoline purchase agreements with end customers.
Answers
A.
Enter into long-term gasoline purchase agreements with end customers.
B.
Trade crude oil derivatives at financial markets in order to benefit from price fluctuations
Answers
B.
Trade crude oil derivatives at financial markets in order to benefit from price fluctuations
C.
Purchase crude oil-related derivatives such as futures or options
Answers
C.
Purchase crude oil-related derivatives such as futures or options
D.
Stock as much raw materials as possible and consider Investing into additional facilities
Answers
D.
Stock as much raw materials as possible and consider Investing into additional facilities
Suggested answer: C

Explanation:

To manage the risk associated with volatile crude oil prices, purchasing crude oil-related derivatives such as futures or options is an appropriate risk management technique. These financial instruments allow the organization to hedge against price fluctuations by locking in prices or securing the right to purchase at a specific price, thereby providing financial stability and predictability. Option A is not directly related to hedging crude oil price risks. Option B involves speculative trading, which can be risky. Option D may not be feasible or cost-effective compared to using derivatives.

Reference: COSO's Enterprise Risk Management -- Integrating with Strategy and Performance.

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asked 18/09/2024
Phillip Roos
49 questions
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