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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Tidewell Energy plans a new offshore wind project. The board identifies that a rise in steel prices is a risk. It notes the risk cannot be influenced by the company and affects all firms building turbines, and that it would be best reduced by fixed-price supply contracts. Which statement best characterises this risk and the appropriate response in a risk framework?

This is an external, sector-wide risk whose source lies outside the company, so management cannot remove the cause. The sensible response is to transfer or share the exposure, for example by fixed-price supply contracts, rather than avoiding, accepting or treating it as an internal failing.

  1. AAn external, systematic risk whose source lies outside the firm, managed here by transfer or sharing through contractsCorrect
  2. BAn internal, unsystematic risk of poor management, best managed by avoidance
  3. CA strategic risk from the firm's mission, best accepted without action
  4. DA compliance risk from breach of regulation, best managed by training

Explanation

Commodity price changes originate outside the firm and affect the whole sector, so they are external. Fixed-price contracts transfer or share the exposure with suppliers. The other options misidentify the source or the nature of the risk.

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