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  • 1.  Question - Risk Mitigation Strategies

    Posted 08-02-2022 10:23 PM
    This practice question is from IMA.  I choose b. because my Wiley material says that option is classified as a risk reduction. Does anyone know why this answer is c? 
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    Question:

    A rice farmer has decided to protect against possible price fluctuations at the time of harvest by purchasing some rice options. What type of risk response strategy has the rice farmer engaged in?


    a. Avoidance.
    b. Reduction.
    c. Sharing.
    d. Acceptance.

    Correct answer c.
    In a financial transaction, the purchasing of options to cover price movement fluctuations is considered a risk transfer or risk-sharing strategy.




  • 2.  RE: Question - Risk Mitigation Strategies

    Posted 08-03-2022 12:55 AM
    C is the answer since there will be sharing of risk when you purchase an option. One of the feature of option is that the holder only has the right and not the obligation to exercise it, in case the situation is favorable to the farmer, he will choose not to exercise the option and in case that it will be unfavorable the farmer can exercise the option, thus, the risk will be transferred to the other party. Moreover, in the option, there is a two party involved, thus, there will be sharing of risk, unlike in the risk reduction strategy, only the farmer will bear the risks.

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    Jerome Umlas
    Sta. Mesa, Manila
    Philippines
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  • 3.  RE: Question - Risk Mitigation Strategies

    Posted 08-03-2022 01:08 AM
    The correct ans is C, because when you are purchasing an option, you are basically transferring your risk to the financial institution. In case of the happening of an adverse event, you will definitely reach the financial institution (bank etc) for paying up for the risk Which you had taken. Hence, you transferred your risk to the Bank.

    Regards,
    Rakshak Kapoor.






  • 4.  RE: Question - Risk Mitigation Strategies

    Posted 08-03-2022 02:08 AM
    Hi,

    The answer is risk sharing or also risk transfer. Hope this clarifies

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    Eashwaran Ramanathan
    Controller
    Mumbai MH
    India
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  • 5.  RE: Question - Risk Mitigation Strategies

    Posted 08-03-2022 02:50 AM


    The answer is "transfer" basically, but according to the options, we have to choose the best possible word similar to the word "transfer" and here it is "sharing".