Skip to content

CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Risk Management

Ganga Steels Ltd. buys a fire and business-interruption policy for its plant and also enters forward contracts for its dollar payables. The Risk Management Committee asks what residual risk remains after these steps. Which statement is most accurate?

Residual risk remains after insurance and hedging, for example through deductibles, exclusions, coverage limits and counterparty default. It is the risk left after treatment, not before it, so the board and Risk Management Committee must still monitor it against the company's risk appetite.

  1. ANo residual risk remains since both risks are fully transferred
  2. BResidual risk remains, such as uninsured losses, policy exclusions, deductibles and counterparty risk, and the board must monitor itCorrect
  3. CResidual risk exists only for the currency exposure
  4. DResidual risk is the risk before any treatment is applied

Explanation

Transfer instruments rarely remove risk completely: deductibles, exclusions, sum-insured limits and counterparty default leave exposure. Residual risk is what remains after treatment, not the inherent risk before it, and it should be compared with risk appetite and monitored.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Risk ManagementFree diagnostic mock

More Risk Management questions