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Which of the following statements regarding long-term supply contracts is FALSE? Select one: A. Long-term supply...

Which of the following statements regarding long-term supply contracts is FALSE?

Select one:

A. Long-term supply contracts insulate the firms from commodity price risk.

B. Long-term supply contracts are designed to eliminate credit risk.

C. The market value of the contract at any point in time may not be easy to determine, making it difficult to track gains and losses.

D. Long-term supply contracts are bilateral contracts negotiated by a buyer and a seller.

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Answer #1

Long-term supply contract is contract between buyer and seller of particular goods for which terms of contract are decided at time 0. Atleast broad terms of contract are fixed.

Therefore, Long-term supply contracts insulate the firms from commodity price risk.

So it is difficult to determine the market value of contract at any point in time since the prices of commodity in longer term would change drastically.

Contract is negotiated contract between buyer and seller.

Therefore 2nd option is false. Purspose of Long-term supply contracts is not eliminating credit risk.

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