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

Kaveri Pharma Ltd. identifies that a proposed export market carries high regulatory and currency uncertainty with returns far below its risk appetite. The board resolves not to enter that market at all. Which treatment is this, and what is its main consequence?

This is risk avoidance. By choosing not to enter the market, the company removes the exposure entirely, but it also gives up whatever return the market might have offered. Transfer, reduction and retention all assume the company continues with the activity in some form.

  1. ARisk avoidance; the company forgoes the potential return as well as the riskCorrect
  2. BRisk transfer; the exposure moves to a counterparty
  3. CRisk reduction; residual risk remains in the market
  4. DRisk retention; the company bears any loss from its own resources

Explanation

Declining to undertake the activity eliminates the exposure and is avoidance. The trade-off is that any opportunity or return from the market is also given up. Transfer and retention both involve staying in the activity.

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