DECA+ Business Management and Administration Practice Exam

How does market risk management function?

1. By increasing market coverage for product sales

2. Through using financial instruments to mitigate risks

3. By avoiding any investments in volatile assets

4. By concentrating investments in stable markets

The correct answer is: Through using financial instruments to mitigate risks

Market risk management primarily functions through the use of financial instruments to mitigate risks associated with market fluctuations. This involves strategies such as hedging, which allows companies to protect themselves from potential losses that arise from changes in market conditions, such as interest rates, exchange rates, or commodity prices. Financial derivatives, like options and futures contracts, are instrumental in this process because they can provide a means to offset potential losses in other investments. By effectively deploying these financial tools, businesses can stabilize their earnings and minimize the adverse effects of market volatility on their overall financial health. This method not only protects current investments but also helps in planning for future financial strategies with more predictability. The other options do not represent the core function of market risk management. For instance, increasing market coverage for product sales does not inherently address risk but rather focuses on growth in revenues. Avoiding investments in volatile assets and concentrating investments in stable markets may minimize exposure to risk, but these strategies do not actively manage or mitigate risk; instead, they are more about risk avoidance or positioning rather than implementing a comprehensive risk management approach through financial instruments.