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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A firm's board is deciding whether to enter a new overseas market. Management argues that the expected profit is attractive, but the downside could threaten the firm's solvency. Within an enterprise risk management framework, which approach to this strategic decision is most appropriate?

The board should compare the expected return with its risk appetite and its capacity to absorb losses before approving the entry. ERM integrates strategy and risk, so the trade-off is assessed explicitly rather than ignored or avoided altogether, and a cost-of-debt hurdle alone does not capture risk.

  1. AEvaluate the expected return against the firm's risk appetite and capacity to absorb losses before approving the entryCorrect
  2. BApprove the entry because strategic risks cannot be quantified and should be left to management discretion
  3. CReject the entry because any strategy with a possible loss is outside the risk appetite
  4. DApprove the entry as long as the expected profit exceeds the firm's cost of debt

Explanation

ERM links strategy to risk appetite, so the board should weigh expected return against potential losses and the capital available to absorb them. Rejecting every strategy with downside ignores the risk-return trade-off, and a cost-of-debt hurdle ignores risk.

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