ICAR AICE-JRF/SRF Agri Risk Management & Insurance: practice questions

1 · Types of risk: production, price, institutional, financial and personal · easy

Which source of risk rises directly with a farm's debt-to-equity ratio?

1. Production risk
2. Institutional risk
3. Financial risk
4. Personal or health risk

2 · Types of risk: production, price, institutional, financial and personal · hard

For the payoff matrix Paddy: 30, 12, 5; Maize: 22, 16, 8; Sorghum: 15, 13, 11 (thousand currency units), a farmer with a Hurwicz coefficient of optimism of 0.6 would choose:

1. Maize
2. Sorghum
3. Maize and Sorghum equally
4. Paddy

3 · History of crop insurance · medium

In the US federal crop insurance programme, Revenue Protection differs from Yield Protection in that it:

1. Covers only prevented planting
2. Guarantees revenue, valuing the guarantee at the higher of the projected and harvest price
3. Pays out on county yields rather than farm yields
4. Is free to farmers at every coverage level

4 · History of crop insurance · medium

Area-yield crop insurance was first proposed by Halcrow (1949) and later re-examined by Miranda (1991), who showed that it:

1. Always gives better protection than individual insurance for every farmer in the unit, whatever the correlation between farm and area yields
2. Can protect farmers about as well as individual cover when their yields track the area yield, without moral hazard or adverse selection
3. Is useful only for livestock
4. Typically requires each farmer's own yield to be measured every season

5 · Yield-index insurance · hard

For an area-yield product, the insurer estimates that in 70% of years there is no claim, in 20% of years the claim is 25% of sum insured and in 10% of years it is 50%. Ignoring loading, what is the actuarially fair premium rate?

1. 37.5% of sum insured
2. 30% of sum insured
3. 10% of sum insured
4. 5% of sum insured

6 · Yield-index insurance · hard

Which farmer gains least protection from an area-yield index product?

1. One whose yields move closely with the unit's average yield
2. One whose yields are weakly correlated with the unit's average yield
3. One who is risk averse
4. One who borrows from a bank

7 · Weather-index insurance · medium

Farmers sowed three weeks late because of a delayed monsoon onset. The index measured rainfall in fixed calendar windows, so the dry spell at the crop's flowering stage fell in a window with a lenient trigger. The resulting mismatch is best called:

1. Spatial basis risk
2. Temporal basis risk
3. Adverse selection
4. Covariate risk

8 · Livestock insurance · medium

Why is individual indemnity livestock insurance poorly suited to nomadic pastoral herds?

1. Pastoral animals never die of drought
2. Pastoralists are risk neutral
3. Livestock deaths are not correlated with drought, so no insurer can build a diversified pool of such herds
4. Checking the identity and cause of death of animals on remote rangeland is costly and open to fraud

9 · Hedging with futures and options · medium

Why do farmers commonly hedge only part of their expected crop before harvest?

1. Exchanges forbid hedging more than half a crop
2. Futures prices never move
3. Yield is uncertain, so a full hedge risks leaving them over-hedged and losing in a short-crop year
4. Hedging removes basis risk only when half the crop is hedged, so any larger hedge adds basis risk

10 · Hedging with futures and options · medium

Who normally supervises commodity futures and options markets?

1. The central bank's farm credit department, which also sets crop loan rates
2. A national market regulator, such as the US Commodity Futures Trading Commission
3. The national crop insurance company
4. The farmers' cooperative federation