Question 1

Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.

Accepted Answer

Workers' compensation insurance is specifically designed to cover injuries and illnesses that are sustained while performing work-related duties.

Question 2

Self-insurance is the practice of

Accepted Answer

Self-insurance refers to the practice of setting aside funds within a company to cover potential losses instead of purchasing insurance from an external provider. This is commonly done for certain types of risks such as property damage or liability claims, where the cost of insurance premiums may outweigh the expected damages. By holding reserves, the company retains control over the funds and can potentially save money in the long run.

Question 3

[blank] is a contract wherein a price is agreed upon today for an asset to be sold in the future.

Accepted Answer

A forward contract is a type of contract where the two parties involved agree to buy or sell an asset at a predetermined price on a specified future date. This contract is usually offered by financial institutions to manage the price volatility of assets, allowing businesses to lock in a certain price for their future needs.

Question 4

Which of the following types of insurance does NOT involve a contract with an external party?

Accepted Answer

Self-insurance means an individual or organization sets aside funds to cover potential losses or damages rather than purchasing insurance from an external party. Therefore, it does not involve a contract with an external party.

Question 5

National Fuel allows its customers to prepurchase heating oil in May for the coming winter.National Fuel's customers who take advantage of the offer

Accepted Answer

The answer of National Fuel allows its customers to prepurchase...

Question 6

The purchase of a forward contract involves the transfer of the risk of a loss from one entity to another.

Accepted Answer

The answer of The purchase of a forward contract involves...

Question 7

A maker of salsa has contracted to buy 100,000 bushels of tomatoes for $4.50 a bushel at the end of August.On the delivery date, the spot price of tomatoes is $4.70 per bushel.Which of the following is true?

Accepted Answer

The seller of the contract profits because they sell the tomatoes at $4.50 per bushel when the market price is $4.70, missing out on the higher price, thus making a $20,000 profit due to the contract terms. The buyer faces a $20,000 loss because they could have bought the tomatoes at the lower spot price of $4.70 per bushel instead of the contracted $4.50, leading to extra expense.

Question 8

Which of the following is a consequence of transferring risk to an insurance company?

Accepted Answer

Transferring risk to an insurance company means that the firm pays a premium in exchange for protection against large losses. This guarantees that the firm will only experience a small loss if an insurable event occurs, which allows them to manage their risk more effectively. However, there is still a cost associated with the premium, so it is not accurate to say that there is no significant cost to the firm. Also, transferring risk to an insurance company does not necessarily lead to an increase in stock value or higher rates of return, as these factors depend on a variety of other factors besides risk management.

Question 9

[blank] is a strategy designed to minimise exposure to unwanted risk by taking a position in one market that offsets exposure to price fluctuations in an opposite position in another market.

Accepted Answer

Hedging is the strategy designed to reduce exposure to unwanted risk by taking a position in one market that offsets exposure to price fluctuations in an opposite position in another market. Forward contracts, spot contracts, and insurance are not necessarily designed for this purpose.

Question 10

How should corporations decide when to self-insure against certain risks and when to purchase insurance from outside parties?

Accepted Answer

The answer of How should corporations decide when to self-insure...

Question 11

Workers' compensation insurance protects employees' income in case they are laid off or fired.

Accepted Answer

Workers' compensation insurance is a type of insurance that provides wage replacement and medical benefits to employees who suffer a work-related injury or illness. It does not provide protection for employees who are laid off or fired.

Question 12

The decision to purchase insurance is justified if the cost of the contract is less than the expected loss.

Accepted Answer

The purpose of insurance is to protect against unexpected financial loss. If the cost of the insurance contract is less than the potential loss, it is a cost-effective decision to purchase insurance.

Question 13

Which of the following should determine whether or not the firm should purchase insurance from an outside party?

Accepted Answer

The cost of the insurance policy and the expected losses should be considered when deciding whether or not to purchase insurance from an outside party. It is important to ensure that the cost of the policy is reasonable in relation to the potential losses that may occur. The frequency and maximum size of incidents should also be taken into account, but they should not be the only factors considered. The firm's normal cash reserves can also be a consideration, but should not be the only determining factor.

Question 14

What guidelines should determine whether or not an individual should buy life insurance?

Accepted Answer

The answer of What guidelines should determine whether or not...

Question 15

It is not legal for a corporation to hold life insurance policies on its employees.

Accepted Answer

Corporations can legally hold life insurance policies on their employees, especially key personnel, through what is known as "key person insurance" or "corporate-owned life insurance" (COLI), to protect against financial losses that could result from the death of the employee.

Question 16

Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.

Accepted Answer

Directors and officers insurance, also known as D&O insurance, is designed to protect the company and its executives from claims of wrongful acts done in their capacity as directors or officers of the company. It does not typically provide coverage in the event of personnel leaving or dying.

Question 17

A large agribusiness firm has contracted to deliver 100 000 bushels of tomatoes for $4.50 a bushel at the end of August.On the delivery date, the spot price of tomatoes is $4.70 per bushel.Which of the following is true?

Accepted Answer

The seller of the contract must sell the tomatoes at the agreed price of $4.50 per bushel instead of the higher spot price of $4.70, resulting in a loss compared to the spot market. The buyer benefits from purchasing at the lower contract price, thus making a profit.

Question 18

Self-insurance would not provide adequate protection in which of the following circumstances?

Accepted Answer

Major ecological disasters resulting from oil spills would be too large and catastrophic to be covered by self-insurance. The potential costs could bankrupt a company, making it necessary to purchase insurance from an outside provider.

Question 19

Which of the following individual situations would best justify the cost of a life insurance policy?

Accepted Answer

A single income with young children is the scenario where life insurance is most needed. If the individual were to pass away, the family would lose their main source of income, and the life insurance policy would provide financial support for the dependent children.

Question 20

Which of the following risks would be the best candidate for self insurance?

Accepted Answer

Self-insurance is a risk management strategy in which a company decides to bear the financial responsibility of certain types of risks rather than paying premiums to an insurance carrier. In this scenario, a large parcel delivery company sustaining occasional damage to its vehicles is a good candidate for self-insurance as the frequency of occurrence is relatively low and the financial impact can be managed by the company. On the other hand, malpractice suits, fire insurance for a business with multiple locations, and life insurance for partners in a law firm involve higher potential risk and financial exposure, making self-insurance less feasible.

Quiz 21: Corporate Risk Management