Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Terms and concepts

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Which of the following could be an example of hedging? Select all that apply:
  1. Buying futures on oil.
  2. Hiring a strategy consultant.
  3. Protecting against fluctuating exchange rates.
  4. Changing back-office processors.
  5. All of the above.
Explanation
Protecting against fluctuating exchange rates and buying oil futures could be hedging against business risk.

Key Takeaway: Hedging is important to smoothing earnings and ensuring consistent cash flow. For instance, Southwest Airlines has protected itself by purchasing contracting for jet fuel at a set price to protect against fluctuating prices.
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