Question 1

CAT bonds seek to protect the insurance industry from catastrophic events.

Accepted Answer

Catastrophe (CAT) bonds are a type of insurance-linked security designed to raise funds for insurance companies in the event of a catastrophic natural disaster, thereby providing them with a mechanism to manage their risk exposure.

Question 2

The strategy using forward contracts is known as "switch out of it" defense.

Accepted Answer

The strategy using forward contracts is typically referred to as hedging, not "switch out of it" defense. Hedging is used to manage or mitigate financial risk.

Question 3

People interpret the term "firm's value" similarly with public and nonpublic companies.

Accepted Answer

The term "firm's value" can be interpreted differently for public and nonpublic companies due to differences in how their values are measured. Public companies' values are often determined by their stock market capitalization, while nonpublic companies' values may be assessed through private evaluations, considering their assets, earnings, and potential for growth.

Question 4

Forward contract characteristics are standardized.

Accepted Answer

Forward contracts are private agreements between two parties and their terms are customizable, not standardized. This contrasts with futures contracts, which are standardized and traded on exchanges.

Question 5

Both forwards and futures obligate the owner of the instrument to buy or sell an asset for a specified price at a specified time in the future.

Accepted Answer

Both forwards and futures contracts are types of derivative financial instruments that obligate the parties to buy or sell an asset at a predetermined future date and price.

Question 6

A company is a "good citizen" if it abides by the law and pursues profits.

Accepted Answer

Being a "good citizen" in a corporate context often goes beyond just abiding by the law and pursuing profits; it also involves engaging in ethical practices, contributing positively to society, and considering the environmental and social impacts of its operations.

Question 7

The enterprise risk manager depends on the actuarial and underwriting expertise to ensure the assets side of the business is well managed.

Accepted Answer

The enterprise risk manager relies on actuarial and underwriting expertise primarily to manage the liabilities side of the business, ensuring that risks are properly assessed and priced, whereas the assets side is typically managed by investment professionals.

Question 8

Life expectancy shows the length of life expected for people born in each year.

Accepted Answer

Life expectancy is a statistical measure that estimates the average number of years a person born in a specific year is expected to live, based on current mortality rates.

Question 9

A put option acts like insurance to protect a floor selling price for a commodity.

Accepted Answer

A put option gives the holder the right, but not the obligation, to sell a commodity at a specified price (the strike price) before the option expires, effectively setting a minimum selling price and acting as a form of insurance against price declines.

Question 10

The chief risk officer (CRO) is responsible for all risk elements of the firm-pure and opportunity risks.

Accepted Answer

The Chief Risk Officer (CRO) is responsible for overseeing and managing all types of risks in an organization, including both pure risks (those that involve only the possibility of loss) and opportunity risks (risks that present potential gains).

Question 11

Contingent surplus notes are securities backed by a pool of diversified assets.

Accepted Answer

Contingent surplus notes are debt instruments issued by insurance companies that can be used to raise capital in times of financial stress but are not backed by a pool of diversified assets.

Question 12

Underwriters specialize in forecasting the losses and developing the losses' potential future impact on the insurers.

Accepted Answer

Underwriters specialize in evaluating and analyzing the risks of insuring people and assets, and determining the terms and pricing of insurance policies, rather than forecasting and developing the potential future impact of losses.

Question 13

A call option grants the right to sell at the strike price.

Accepted Answer

A call option grants the holder the right to buy an asset at the strike price, not sell.

Question 14

Together, income statements and balance sheets are known as financial statements.

Accepted Answer

Income statements and balance sheets are two primary types of financial statements that businesses use to report their financial performance and financial position, respectively.

Question 15

The strike price in an options contract is also called the exercise price.

Accepted Answer

The strike price, also known as the exercise price, is the fixed price at which the holder of an options contract can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset or security.

Question 16

Futures are traded in the over-the-counter market.

Accepted Answer

Futures are traded on organized exchanges, not in the over-the-counter (OTC) market. These exchanges provide a centralized marketplace for buyers and sellers, offering standardized contracts and clearing services.

Question 17

Due diligence is the process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

Accepted Answer

Due diligence is the process of investigating and evaluating a business or investment opportunity, typically before a transaction, to assess its value and risks. It does not specifically involve selecting which risks to accept or identifying adverse selection.

Question 18

The swap derivative can act as insurance to mitigate interest rate risk.

Accepted Answer

A swap derivative, particularly an interest rate swap, can be used by parties to exchange interest rate payment obligations, effectively allowing them to hedge against or mitigate the risk of fluctuating interest rates.

Question 19

Franchise value is an alternative term for brand equity.

Accepted Answer

Franchise value and brand equity both refer to the added value a brand name gives to a product or service beyond the functional benefits, indicating how well-known and esteemed the brand is in the market.

Question 20

Capital and surplus represent debt on the balance sheet of a nonfinancial firm.

Accepted Answer

Capital and surplus are components of a company's equity, not debt. They represent the owners' stake in the company, not obligations the company owes to creditors.

Quiz 5: The Evolution of Risk Management: Enterprise Risk Management