Cisco
CompTIA
ISC
EC-Council
EXIN
Fortinet
ITIL
Juniper
Microsoft
VMware
Avaya
SAP
Google
NVIDIA
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk
ServiceNow
All Vendors
  2. Home
  3. Exams
  4. IIA
  5. CIA

IIA CIA Exam
Certified Internal Auditor Exam (Page 9 )

Updated On: 12-Jan-2026
Page 9 of 342
PDF with 1702 Questions

The activity of trading futures with the objective of reducing or controlling risk is called

  1. Insuring.
  2. Hedging.
  3. Short-selling.
  4. Factoring.

Answer(s): B

Explanation:

Hedging is the use of offsetting commitments to minimize the effect of adverse future price movements. Thus, a financial manager may limit many risk exposures by trading in futures markets.



A corporation was a party to the following transactions during November and December of the current year. Which of these transactions is most likely to be defined as a derivative?

  1. Purchased 1, 000 shares of ordinary stock of a public corporation based on the assumption that the stock will increase in value.
  2. Purchased a term life insurance policy on the entity's chief executive officer to protect the entity from the effects of an untimely demise of this officer.
  3. Agreed to cosign the note of its 100%-owned subsidiary to protect the lender from the possibility that the subsidiary might default on the loan.
  4. Based on its forecasted need to purchase 300, 000 bushels of wheat in 3 months, entered into a 3-month forward contract to purchase 300, 000 bushels of wheat to protect itself from changes in wheat prices during the period.

Answer(s): D

Explanation:

A derivative is a financial instrument commonly used in hedging activities. Its value changes with the change in the underlying a specified interest rate, security price, foreign currency exchange rate, price index, commodity price, etc.). It requires little or no initial net investment compared with contracts having similar responses to changing market conditions, and it is settled in the future. The purchase of the forward contract as a hedge of a forecasted need to purchase wheat meets the criteria above. The forward contracts value will change with changes in the underlying the commodity price), requires little or no initial net investment the purchase is in three months), and settlement is in the future.



If a corporation holds a forward contract for the delivery of government bonds in 6 months and, during those 6 months, interest rates decline, at the end of the 6 months the value of the forward contract will have

  1. Decreased.
  2. Increased.
  3. Remained constant.
  4. Any of the answers may be correct, depending on the extent of the decline in interest rates.

Answer(s): B

Explanation:

Interest rate futures contracts involve risk-free bonds. When interest rates decrease over the period of a forward contract, the value of the bonds and the forward contract increase.



An automobile company that uses the futures market to set the price of steel to protect a profit against price increases is an example of

  1. A short hedge
  2. A long hedge
  3. Selling future.-is to protect the company from loss.
  4. Selling future.-is to protect against price declines.

Answer(s): B

Explanation:

A change in prices can be minimized or avoided by hedging. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements. The automobile company desires to stabilize the price of steel so that its cost to the company will not rise and cut into profits. Accordingly, the automobile company uses the futures market to create a long hedge, which is a futures contract that is purchased to protect against price increases.



The use of derivatives to either hedge or speculate results in

  1. Increased risk regardless of motive.
  2. Decreased risk regardless of motive.
  3. Offset risk when hedging and increased risk when speculating.
  4. Offset risk when speculating and increased risk when hedging.

Answer(s): C

Explanation:

Derivatives, including options and futures, are contracts between the parties who
contract. Unlike stocks and bonds, they are not claims on business assets. A futures contract is entered into as either a speculation or a hedge. Speculation involves the assumption of risk in the hope of gaining from price movements. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements.



Viewing page 9 of 342
Viewing questions 41 - 45 out of 1702 questions



Post your Comments and Discuss IIA CIA exam prep with other Community members:

Join the CIA Discussion