Which of the following statements regarding insurance and hedging is true?
A)Both insurance and hedging deal only with pure risks.
B)Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction.
C)Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer.
D)Both insurance and hedging reduce objective risk but do not involve the transfer of risk.

Question

Quizplus · Accepted Answer

Insurance and hedging both involve transferring risk, but insurance involves paying premiums to reduce objective risk, while hedging involves taking on a second offsetting position to reduce objective risk. Additionally, insurance can deal with both pure and speculative risks, while hedging only deals with speculative risks.

Which of the Following Statements Regarding Insurance and Hedging Is