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CFA Level I · CFA Level I Exam · Introduction to Risk Management

A bank installs additional fraud-detection software and requires dual authorization on large payments. It continues all existing payment services. Which description of this response, and its effect on the risk, is most accurate?

This is risk mitigation. Controls reduce the likelihood or size of fraud losses, but the bank continues the activity and keeps the residual risk. It is not avoidance, which would require stopping the services, and it is not transfer, since the vendor does not absorb the losses.

  1. AMitigation, which lowers the likelihood or size of losses while the bank keeps the residual riskCorrect
  2. BAvoidance, which removes the payment risk because the controls prevent all fraud
  3. CTransfer, which moves the fraud losses to the software vendor

Explanation

Controls reduce the probability or severity of loss, which is mitigation. Residual risk stays with the bank because the activity continues and controls cannot stop all fraud. Avoidance would require ceasing the services, and the vendor does not take on the losses.

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