A3479C Risk Assessment Revision 0

_____ calculates the damages (in monetary value) due to a risk; by estimating the probabilities of its occurrence.

• Quantitative risk assessment

• Qualitative risk assessment

• Risk impact matrix

• Risk matrix

Answer explanation

Agribusiness risk can be assessed either quantitatively or qualitatively. In quantitative risk assessment, the risk’s impact is explicitly express in terms of monetary figures, while its probability of occurrence calculated. Qualitative risk assessment, on the other hand, analyse impact through comparison and descriptive terms. Risk matrix and Risk Impact matrix are examples of qualitative risk assessment.

For the Payoff Matrix an optimistic farmer will use ____ for decision making.

• Maximax

• Maximin

• Minimax

• Expected income

Answer explanation

Optimistic farmer will make use of maximax (best of best).

Pessimistic/Conservative farmer will make use maximin (best of the worst). Minimax is based on the 'regret' value or opportunity loss. Because it is about loss, you choose the smallest regret (therefore 'mini'). Expected value is not covered in the module in details, it involved calculating the expected income with the probabilities of

each scenario (or states of nature).

Given the following loss table, which decision should be made based on Minimax criterion?

• Alternative A

• Alternative B

• Alternative C

• Cannot make a decision based on this

Answer explanation

Here, you are seeing a 'loss' table which is created by first identifying the best payoff under each state (checking vertically down) and then taking the payoff of each alternative under each state minus the best payoff of the state. To make decision, you take the largest loss under each action (in this case, 90 for Alternative A, 110 for Alternative B and 80 for Alternative C) and then select the smallest of these. (it is loss, afterall).

_____ is an idiosyncratic risk.

• Farm worker got injured by equipment

• Power failure on the farm

• Pandemic affecting supply chains

• Evolution of production techniques

• Water pipe burst

Answer explanation

Idiosyncratic risks are risks that affect farmers independently while systemic risks affect a large number of producers at the same time. Injuries, bursting of pipes and power failure of the farm have a localised effect on only that particular farm or a small number of producers. However, pandemics that affected the global supply chain and evolution of production techniques (such as adoption of genetically modified organisms) will affect large number of producers - thus they are systemic risks.

Which of the following are technical risk management mechanisms?

• Hedging

• Low risk production

• Crop rotation

• Irrigation

• Insurance

Answer explanation

Risk management techniques can be categorised into technical or financial risk management.

Technical management methods refers to the management of risks related directly to growing, whereas Financial management methods usually refers to monetary forms of risk management. In this question, low risk production, irrigation and crop rotation are technical management methods while insurance and hedging are financial management methods.

_____ is a standardised contract that is traded on an exchange with no actual sale of goods or purchase.

• Exchange traded funds

• Futures

• Insurance

• Forward contracts

Answer explanation

Futures are similar to forward contracts but they a form of standardized contracts that are traded on an exchange without actual sales or purchase of goods. Forward contracts will have negotiable terms and conditions between the producer and the buyer and eventual sale of produce.