Financial Risk Manager Part 1

Explanation

This method of risk management involves shifting the risk from one party to another. In the context of the question, the company is transferring its risk to another party through the use of derivative products. By paying a premium, the company is essentially buying insurance against a certain level of risk. The party receiving the premium is accepting the risk and is obligated to compensate the company if the risk event occurs. This method is commonly used in financial markets where risks can be quantified and priced. It allows companies to focus on their core business activities without worrying about potential financial losses from risks that can be transferred.

Why Choice A is incorrect: Avoiding the risk involves not taking any action that could lead to the risk in the first place. This strategy does not involve paying a premium to transfer risk, but rather avoiding situations or decisions that could potentially lead to financial instability.

Why Choice B is incorrect: Retaining the risk means accepting and managing it internally within the company, without transferring it to another party. In this case, there would be no need for a derivative product or payment of a premium.

Why Choice D is incorrect: Mitigating the risk involves taking steps to reduce its potential impact or likelihood of occurrence, but not necessarily transferring it entirely as described in this scenario with derivative products.