4.5.1 risks and uncertainty Flashcards
What is the difference between risk and uncertainty?
Risks are a quantifiable probability of damage, loss or injury occurring.
Uncertainty considers a situation which may or may not happen, but the probability of each outcome is unknown.
What are shocks?
These are unforeseen changes which impact the economy, and can be cause by humans or natural disasters.
What is a recent example of a major shock?
The 2008 Global Financial Crisis, which impacted the economy for years. It was caused by risks taken by banks.
What are future contracts?
These are a method for investing in commodities, involving buying or selling an asset with an agreed price in the present, but delivery and payment in the future.
What is a forward market?
An informal financial market where future contracts ar emade.
What is the role of insurance?
It is designed to reduce the risks of decisions.
What is a premium in insurance?
The price paid to cover a risk, firms might include these in their costs which help protect them against huge losses.
