L07 Methods of Reducing Risk

L07 Methods of Reducing Risk - Methods of Reducing Risk...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
    Methods of Reducing Risk  Risk Transfer
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    Three Standard Methods Hedging Insuring   Diversifying
Background image of page 2
    Hedging Taking the sure thing in order to reduce  exposure to a loss By hedging you also give up the  possibility of a gain Farmers sell crops on forward contracts Magazine subscription for three years  instead of one at a time Long-term contracts for pro athletes
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    Insurance Protection against the financial  consequences give the loss of or  damage to an asset. The purpose of purchasing insurance is  to guarantee the same level of income  whether a loss occurs or not. Expected value is the same with or  without insurance
Background image of page 4
    Insurance Companies Pooling policies of many customers  reduces risk to a minimum Law of large numbers: Total  premiums paid will equal total  payouts
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    Insurance Companies Premiums also include administrative  costs. Self insurance is a way to avoid extra  costs Diversification is a method of self  insurance
Background image of page 6
    Diversification To divide up (investments, production,  liabilities, etc.) among a variety of  options The purpose is to reduce the risk  involved with excessive specialization.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/17/2009 for the course KINS 4520 taught by Professor Maxcy during the Spring '09 term at University of Georgia Athens.

Page1 / 24

L07 Methods of Reducing Risk - Methods of Reducing Risk...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online