Risk and uncertainty

What is risk in economics?

Risk is a quantifiable probability of damage, loss, or injury occurring, where the likelihood can be measured.

Give an example of risk for banks.

Banks risk losing money if borrowers fail to repay loans or if investment returns are lower than expected.

What is uncertainty in economics?

Uncertainty refers to a situation where future outcomes are unknown and probabilities cannot be assigned to them.

What are shocks in economics?

Shocks are unforeseen events that have a significant impact on the economy, caused by humans or natural disasters.

Give an example of a major economic shock.

The 2008 Global Financial Crisis, caused by risky banking practices, impacted the global economy for years.

What is the currency market used for?

It is used to trade one currency for another.

What is a speculative attack on a currency?

When investors sell large amounts of a currency to devalue it, affecting the exchange rate.

What happens in commodity markets?

Investors trade primary products like wheat, gold, and oil.

What is a future contract?

An agreement to buy or sell an asset at a set price now for delivery and payment in the future.

What is a forward market?

An over-the-counter informal financial market where contracts are made that set the price of a financial instrument or asset for future delivery.

What is the role of insurance in business?

Insurance helps reduce the risks associated with business decisions.

What is an insurance premium?

The price paid for an insurance policy to cover a specific risk.

How do firms handle insurance costs?

Firms include insurance premiums in their costs to protect against major financial losses.