Examkin

Question

Difficulty: MediumDefinition and Types of Risk

An international importing firm faces the possibility of financial loss if foreign currency exchange rates shift unfavorably before a major shipment is paid for. Because this exposure is entirely outside the firm's control, it is classified as a pure risk and is eligible for coverage under a standard commercial insurance policy.

Answer: Answer

Answer

False
The statement is false. Currency fluctuation represents a speculative risk because the importing firm could either lose money or gain a financial advantage depending on how the market moves. Standard insurance policies only cover pure risks (where there is no chance for gain), whereas speculative risks are uninsurable and typically handled through financial strategies like market hedging.

Step-by-Step Solution

1
Analyze the nature of the risk presented in the scenario.
Currency exchange rates can move unfavorably (causing a financial loss) or favorably (causing a financial gain).
Identifying whether there is any possibility for financial gain is the necessary test to distinguish between pure and speculative risks.
2
Classify the risk based on insurance definitions.
Because there is a chance for financial gain, this is classified as a speculative risk rather than a pure risk.
Pure risks are strictly defined by having only the possibility of loss or no loss, with zero potential for gain.
3
Evaluate the insurability of the risk.
Speculative risks are fundamentally uninsurable by traditional property and casualty policies.
Insurance is designed to indemnify against pure risks, not to protect against business or investment volatility.

Key Concept

Pure vs. Speculative Risk
Rate this question

Topics

Definition and Types of Risk

More questions from this topic