1. Which of the following methods enable clearinghouses to reduce overall credit risk?
a) By holding an insurance policy for each market participant
b) By netting the money paid to each participant against the money that participant owes
c) By charging each market participant a fee that covers the cost of guaranteeing against default
d) By engaging in a hedge that balances any net risk to the clearinghouse
e) None of the given choices
2. The First family (Adam, Eve, Seth, Cain) have several risk exposures. Adam is a practicing attorney with upper-middle income and positive net worth. Cain is 20 years old, and Seth is 8 years old. Eve is a full-time homemaker. Identify each of the following as critical, important, or unimportant risks.
a. Professional liability risk in Adam’s practice.
b. Liability and property loss risks with Cain’s 15-year-old (low value) car.
c. Disability for Eve.
d. Risk of fire destroying their home if: i) no mortgage debt; ii) large mortgage debt.
e. Medical expense risk for Seth.
f. Premature death risk for: i) Adam; ii) Eve; iii) Seth.