What term refers to the act of embezzling or misappropriating funds?

The term that refers to the act of embezzling or misappropriating funds is "defalcate." This word specifically denotes the wrongful use of funds or property for personal gain, often in a context involving a breach of trust, such as in financial or fiduciary responsibilities. It is derived from legal and financial terminology, highlighting its connection to the mismanagement of assets.

Other terms in the choices serve different meanings. "Contumacious" describes someone who is stubbornly disobedient or rebellious, with no direct connection to financial misconduct. "Caparison" refers to decorative coverings for horses, particularly in a regal or ceremonial context, and does not relate to financial matters. "Denouement" is a literary term that refers to the resolution or conclusion of a story, unrelated to concepts of financial misappropriation. Hence, "defalcate" is the most appropriate term for the act of embezzling or misappropriating funds.