Name four major financial risks and a primary mitigation approach for each.

Name four major financial risks and a primary mitigation approach for each.

• A. Credit risk — hedging or rate locks
• B. Liquidity risk — enhanced liquidity planning and contingency funding
• C. Foreign exchange risk — hedging or natural hedges
• D. Interest rate risk — credit checks and collateral

Answer: (B)

Matching major financial risks with the most effective mitigation is being tested here. For liquidity risk, the best pairing is enhanced liquidity planning and contingency funding. Liquidity risk arises when a firm cannot meet its short‑term obligations or fund unexpected needs. The strongest defense is to ensure cash is available when required, which means thorough cash flow forecasting, liquidity stress testing, maintaining backup lines of credit, and having a clear contingency funding plan to access funds quickly in a stress scenario. The other pairings aren’t as direct in this context. For credit risk, while tools like collateral or credit derivatives can help, rate locks don’t address the fundamental issue of counterparty default risk. For foreign exchange risk, hedging or natural hedges is a common and valid mitigation, but the emphasis in this question is on the liquidity-focused approach as the primary mitigation. For interest rate risk, credit checks and collateral target credit exposure rather than the interest rate exposure itself; managing interest rate risk is typically done through hedging with rate instruments or adjusting the debt structure, not via credit screening.

Matching major financial risks with the most effective mitigation is being tested here. For liquidity risk, the best pairing is enhanced liquidity planning and contingency funding. Liquidity risk arises when a firm cannot meet its short‑term obligations or fund unexpected needs. The strongest defense is to ensure cash is available when required, which means thorough cash flow forecasting, liquidity stress testing, maintaining backup lines of credit, and having a clear contingency funding plan to access funds quickly in a stress scenario.

The other pairings aren’t as direct in this context. For credit risk, while tools like collateral or credit derivatives can help, rate locks don’t address the fundamental issue of counterparty default risk. For foreign exchange risk, hedging or natural hedges is a common and valid mitigation, but the emphasis in this question is on the liquidity-focused approach as the primary mitigation. For interest rate risk, credit checks and collateral target credit exposure rather than the interest rate exposure itself; managing interest rate risk is typically done through hedging with rate instruments or adjusting the debt structure, not via credit screening.