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22. Which of the following scenarios is NOT an example of risk management? a. A household...

22. Which of the following scenarios is NOT an example of risk management? a. A household purchases life insurance in the event of the premature death of the primary breadwinner. b. A framer enters into a futures contract for the sale of his wheat in case the price of wheat falls in the future. c. A speculator purchases a call option so that he can purchase the underlying stock at the specified price in the event its price goes up. d. An investor purchases a put option on a stock he already owns so that he can sell it at the specified price if its price drops.

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Expert Solution

Ans: (c) A speculator purchases a call option so that he can purchase the underlying stock at the specified price in the event its price goes up.

Speculator is a person who purchase of an asset with the hope that it will become more valuable in the near future.he is anticipating whether the price of a security or asset will increase or decrease. They try to profit big, and one way to do this is by using Call option or a put option.

Other Options: On Identification and assessment of Risks, they must be managed by prioritising and selceting the one among the below risk management strategies

  • Avoid: Avoidance eliminates the risk by removing the cause. It may lead to not doing the activity or doing the activity in a different way. This is followed in (b)(Here farmer sold in the futures market)
  • Transfer: the risk is shifted to a third party. The third-party, like insurance company is paid premium to accept or handle the risk on your behalf and hence the ownership, as well as impact of the risk, is borne by that third party. This is followed in (a),(d)
  • Mitigate: Mitigation reduces the probability of occurrence of a risk or minimizes the impact of the risk within acceptable limits. This is based on the fundamental principle that earlier the action taken to reduce the probability or impact of a risk is more effective than doing fixes to repair the damages after the risk occurs.
  • Accept: Acceptance means accepting the risk, especially when no other suitable strategy is available to eliminate the risk.
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jeff jeffy answered 1 year ago
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