Choice "B" is correct. Relocation of production facilities to assure an uninterrupted supply chain (e.g., sourcing raw materials) is an example of risk reduction. The Committee of Sponsoring Organization's (COSO) Enterprise Risk Management (ERM) framework identifies four methods of responding to risk, including avoidance, reduction, sharing and acceptance. The relocation of the plant reduces the risk of supply chain interruption. Risk avoidance techniques might involve discontinuing the product that uses the raw material altogether or replacing the raw material with a locally available product. Risk acceptance is typically associated with doing nothing. Risk sharing is often associated with purchasing insurance, however, in this instance, the company might chose to share risk by buying purchase options to ensure raw material availability from other sources or obtaining purchase commitments from local suppliers (with penalty clauses for nonperformance).
Choice "c" is incorrect. The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance. Prospect theory, which seeks to describe how people decide between alternatives that involve risk, is not described by the COSO as a risk management technique.
Choice "d" is incorrect. The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance. Risk sharing is often associated with purchasing insurance, however, in this instance, the company might chose to share risk by buying purchase options to ensure raw material availability from other sources or obtaining purchase commitments from local suppliers (with penalty clauses for nonperformance).
Choice "a" is incorrect The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance Risk acceptance is typically associated with doing nothing.