Skip to content

ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk

Hadley Pharma sells a product in a country where a new law may ban it. Management estimates a 10% chance of a ban, with a loss of $50 million if it happens. The board decides not to lobby or insure and instead budgets $5 million as an expected cost. Which description best fits the board's decision?

This is risk acceptance. The board calculates an expected loss of $5 million (10% x $50 million) and budgets for it without reducing, transferring or avoiding the exposure, so the company itself retains the risk.

  1. ARisk acceptance, using expected value to quantify the exposureCorrect
  2. BRisk transfer, because a cost has been budgeted
  3. CRisk avoidance, because the exposure has been measured
  4. DRisk sharing, because the cost is spread over the budget

Explanation

Expected loss is 10% x $50m = $5m. The board takes no action to reduce, transfer or avoid, and budgets for the loss, which is risk acceptance. Budgeting is not transfer since no third party bears the loss, and measuring a risk is not avoiding it.

Did you get it right without looking?

One question tells you little. A timed set on Managing, monitoring and mitigating risk shows your real accuracy, how long you take and where you lose marks.

Practise Managing, monitoring and mitigating riskFree diagnostic mock

More Managing, monitoring and mitigating risk questions