Insurance mitigates uncertainty by transferring risk from the policyholder to the insurance provider.
2. Which are the reasons why buying insurance may not always be advisable? (multiple choice)
(1) Insurance is exposed to adverse selection and moral hazard
(2) Insurance premium is set to cover operating costs and earn profits for the insurance provider
(3) Insurance providers are prone to fail due to reckless investments
(4) Insurance premium is wasted if the insured event does not materialize
(5) One may prefer to accept the variability in outcomes resulting from an event
(1) Forwards and futures are both contracts to trade at a future date. The difference is that forwards are traded in __________ markets and futures are traded on __________
(2) Swaps are contracts to exchange future __________ , which the contracting parties deem equivalent in terms of present value.
(3) An option transaction where the buyer of the option has a right to sell an asset at a future date is a __________ option.