Suppose You Start with $100 and Buy Stock for £50

question 16

Multiple Choice

Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2.One year later,the stock rises to £60.You are happy with your 20 percent return on the stock,but when you sell the stock and exchange your £60 for dollars,you only get $45 since the pound has fallen to £1 = $0.75.This loss of value is an example of

• A)exchange rate risk.
• B)political risk.
• C)market imperfections.
• D)weakness in the dollar.

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Definitions:

Deductibles

The amount a policyholder must pay out-of-pocket before an insurance company will cover the remaining costs of a claim.

Moral Hazard

A situation where one party is more likely to take risks because the negative consequences of the risk are borne by another party.

Health Insurance

A type of insurance coverage that pays for medical and surgical expenses incurred by the insured, often providing a hedge against financial risks arising from healthcare costs.

Adverse Selection

A situation in economics where one party in a transaction has more information than the other, often leading to inefficiencies and potentially flawed market outcomes.