Which of the Following Statements Regarding Insurance and Hedging Is

question 37

Multiple Choice

Which of the following statements regarding insurance and hedging is true?

• A)Both insurance and hedging deal with pure risks.
• B)Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction.
• C)Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer.
• D)Both insurance and hedging reduce risk but do not involve the transfer of risk.

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Definitions:

Semi-Annually

A term indicating something that happens twice a year or every six months.

Straight Bond Value

The value of a bond that does not have any embedded options, calculated by considering its coupons and principal repayment, discounting back at an appropriate yield rate.

Black-Scholes Formula

A mathematical model used to estimate the price of European-style options, considering factors like the asset's price, time, volatility, and risk-free rate.

Straight Bond Value

The value of a bond that does not have any embedded options such as convertibility or callability, calculated based on its coupon payments and maturity value.