Due to extreme liquid fuel price fluctuations, management decided to designate a specific price below which liquid fuel shall not be sold to customers, but instead shall be pumped into storage…

Question

Options

• ARisk reduction.
• BRisk transfer.
• CRisk acceptance.
• DRisk avoidance.

• A
  5% (1)
• B
  5% (1)
• C
  81% (17)
• D
  10% (2)

Explanation

Option C is correct because management is acknowledging the risk of price fluctuations and responding with a predetermined contingency plan - when prices fall below the floor, they store the fuel rather than sell at a loss. They haven't eliminated, shifted, or lessened the underlying risk; they've simply accepted it will occur and established a protocol for when it does.

Why the distractors are wrong:

• A (Reduction) would mean actively decreasing the likelihood or impact of price swings - e.g., negotiating long-term fixed-price supplier contracts. Setting a floor price doesn't reduce the fluctuation itself.
• B (Transfer) means shifting the risk to a third party, such as using futures/hedging contracts or taking out insurance. No third party absorbs the risk here.
• D (Avoidance) would mean exiting the fuel business entirely to eliminate exposure. Management is still operating in the market.

Memory tip: Think of acceptance as "We know it will happen - here's our plan." Any time a policy triggers a contingency action (store it, hold it, wait it out) rather than eliminating or offloading the risk, that's acceptance. The storage tank is the contingency, not a fix.

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