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

Which risk response is being used when a company enters a fixed-price forward contract to eliminate uncertainty in its future import payment in dollars?

Entering a forward contract to fix the rupee cost of a future dollar payment is risk hedging, a form of mitigation using a derivative. The company continues importing, so it is not avoidance, and it does not bear the exchange risk, so it is not acceptance.

  1. ARisk hedging (mitigation through a derivative)Correct
  2. BRisk avoidance by stopping imports
  3. CRisk acceptance
  4. DRisk retention through self-insurance

Explanation

A forward contract fixes the exchange rate, reducing exposure through a derivative, which is hedging. Avoidance would require stopping the activity. Acceptance and retention mean bearing the risk without such action.

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