Certified Management Accountant Practice Exam

Which type of risk involves fluctuations in commodity prices?

1. Interest rate risk

2. Market risk

3. Commodity risk

4. Exchange rate risk

The correct answer is: Commodity risk

Commodity risk specifically pertains to the potential financial loss that can arise from changes in the prices of raw materials or basic goods, such as oil, metals, and agricultural products. This type of risk is important to understand as it can significantly impact businesses that rely on commodities for their production processes or products. Changes in commodity prices can occur due to various factors, including supply and demand dynamics, geopolitical events, economic shifts, and natural disasters. For companies directly involved in the procurement, production, or consumption of commodities, fluctuations in these prices can affect profit margins and overall financial performance. Understanding commodity risk is essential for management accountants because it helps in assessing the financial exposure of a business to the volatility inherent in commodity markets. This awareness enables organizations to implement hedging strategies or other risk management techniques to mitigate the impact of unpredictable price changes on their operations.