Which of the following strategies does not reduce risk?
A) building flexibility into the firm's operations
B) increasing the proportion of the firm's costs that are fixed
C) taking out an insurance policy
D) hedging with derivative contracts

Question

Quizplus · Accepted Answer

Increasing the proportion of the firm's costs that are fixed actually increases the risk as it makes the firm more vulnerable to changes in sales and market conditions. Higher fixed costs mean that the firm has a higher breakeven point and must generate more sales to cover its costs. The other options - building flexibility, taking out insurance, and hedging with derivative contracts - all reduce risk in some way.

Which of the Following Strategies Does Not Reduce Risk