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CMA Final · Strategic Performance Management and Business Valuation · Corporate Risk Management Performance

Which of the following is a risk-transfer response, as opposed to risk avoidance, reduction or acceptance?

Hedging currency exposure through a forward contract with a counterparty is risk transfer, since the financial consequence of adverse movement is shifted to another party. Discontinuing an activity is avoidance, sprinklers are reduction, and retaining small losses is acceptance.

  1. ADiscontinuing a product line with unacceptable risk
  2. BInstalling sprinklers to lower fire damage
  3. CEntering into a fixed-price forward contract with a hedging counterparty to cover currency exposureCorrect
  4. DRetaining small losses within the firm's own budget

Explanation

A forward or insurance shifts the financial consequence to another party, which is transfer. Discontinuing is avoidance, sprinklers are reduction, and retaining small losses is acceptance.

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