Certified Supply Chain Professional (CSCP) Practice Exam

What best defines hedging in a financial context?

1. Lock in price now for something that needs to be bought later

2. Investing in high-risk assets

3. Buying insurance for future losses

4. Creating diversified investment portfolios

The correct answer is: Lock in price now for something that needs to be bought later

Hedging in a financial context is best defined as the practice of locking in a price now for an asset or commodity that will be purchased in the future. This strategy is employed to mitigate the risk of price fluctuations that could occur between the time a decision is made to buy and the time the purchase is actually made. By locking in a price, the buyer can protect themselves against the risk of increasing costs, ensuring financial predictability and stability. This approach is often used in various markets, such as commodities, foreign exchange, and even in investments, where parties enter into financial instruments like futures or options contracts to safeguard against adverse price movements. It allows businesses and investors to formulate more effective strategies based on anticipated market conditions without exposing themselves excessively to potential losses.