What are some of the means by which firms can transfer risk to other parties? Should firms always transfer risks when it is possible to do so?

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Quizplus · Accepted Answer

The Answer is Firms can purchase insurance policies which transfer certain risks to the insuring party. Companies can and often do purchase policies to cover lawsuits brought by employees or customers, worksite accidents, fire or storm damage, and the like. Businesses like ski resorts can even purchase weather insurance. Firms cans use derivatives markets (futures and options contracts) to protect themselves against sudden spikes or declines in commodity prices or financial assets, as well adverse moves in currency exchange rates. Transferring risk is costly, so it always reduces cash flows. The decision to keep or transfer risk must result from a cost/benefit analysis and an attempt to discern the preferences of their shareholders.

What Are Some of the Means by Which Firms Can