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RMIN 4000 uga test 1 Latest 2024/2025 Updated Questions and Answers Guaranteed 100% Success.
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hedging price risks - hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange, such as the chicago board of trade subjective probability - the individual's personal estimate of the cha...

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  • September 11, 2024
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  • 2024/2025
  • Exam (elaborations)
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RMIN 4000 uga test 1
hedging price risks - hedging is a technique for transferring the risk of unfavorable price
fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange, such
as the chicago board of trade



subjective probability - the individual's personal estimate of the chance of loss

example: people who buy a lottery ticket on their birthday may believe it is their lucky day and
overestimate the small chance of winning



enterprise risk - a term that encompasses all major risks faced by a business firm. such risks
include pure risk, speculative risk, strategic risk, operational risk, and financial risk



risk - uncertainty concerning the occurrence of a loss



uncertainty - probabilities cannot be estimated



loss exposure - any situation or circumstance in which a loss is possible, regardless of whether a
loss actually occurs

example: earthquake or flood causing damage to a manufacturing plant



objective risk (degree of risk) - the relative variation of actual loss from expected loss

example:10,000 houses insured of a long period of time and on average 100 houses burn each year,
however it would be rare for exactly 100 to burn each year



law of large numbers - as the number of exposure units increases, the more closely the actual loss
experience will approach the expected loss experience



example: as the number of homes under observation increases, the greater is the degree of accuracy in
predicting the proportion of homes that will burn

, subjective risk (perceived risk) - uncertainty based on a person's mental condition or state of mind



example: driver with previous convictions for drunk driving tries to drive home and wonders if he will get
arrested by the police or not



chance of loss - the probability that an event will occur



objective probability - the long run relative frequency of an event based on the assumptions of an
infinite number of observations and of no change in the underlying conditions



two ways objective probability can be determined - 1) deductive reasoning (priori probabilities):
probability of getting a head from the toss of a perfectly balanced coin is 1/2 bc there are two sides

2) inductive reasoning: the probability that a person age 21 will die before age 26 cannot be logically
deduced, life insurers can estimate the probability of death and sell a 5 year life insurance policy for a 21
yr old




types of risk - -pure risk

-speculative risk

-diversifiable risk

-nondiversifiable risk

-enterprise risk

-systemic risk



objective risk - the relative variation of actual loss from expected loss



peril - the cause of loss

example: house burns down, peril is the fire



hazard - condition that creates or increases the frequency or severity of loss

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