CFA Level I · CFA Level I Exam · Introduction to Risk Management
An airline fears a sharp rise in fuel prices and enters a derivative contract that pays it if fuel prices rise above a set level. The airline still operates all its flights. This approach is most likely:
This is risk shifting. The derivative changes the airline's payoff distribution by passing part of the fuel price exposure to a counterparty while operations continue. It is not avoidance, because flights still operate, and it is not acceptance, since the exposure is actively hedged.
- ARisk shiftingCorrect
- BRisk avoidance
- CRisk acceptance
Explanation
Using derivatives to move the price exposure to a counterparty is risk shifting, a form of transfer that changes the distribution of outcomes without removing the underlying activity. Because flights continue, it is not avoidance, and the airline is not accepting the exposure.
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