Which strategy involves moving risk to another party?

Which strategy involves moving risk to another party?

• A. Hedging
• B. Insurance (transferring risk)
• C. Diversification
• D. Risk retention

Answer: (B)

Transferring risk to another party is about shifting the potential financial impact of a loss away from you onto someone else. Insurance does this because you pay a premium and the insurer agrees to cover certain losses, so a large expense is borne by the insurer rather than by you. Hedging reduces risk by offsetting losses with another position but doesn’t fully transfer it; diversification spreads risk across many assets rather than handing it off to a single party; risk retention means you keep and bear the risk yourself. For example, car insurance shifts the financial burden of a serious accident from you to the insurance company.

Transferring risk to another party is about shifting the potential financial impact of a loss away from you onto someone else. Insurance does this because you pay a premium and the insurer agrees to cover certain losses, so a large expense is borne by the insurer rather than by you. Hedging reduces risk by offsetting losses with another position but doesn’t fully transfer it; diversification spreads risk across many assets rather than handing it off to a single party; risk retention means you keep and bear the risk yourself. For example, car insurance shifts the financial burden of a serious accident from you to the insurance company.