Seminar 4

MN7406
Sergio Currarini
 • In this example enforcement of debt and
Globalisation policy was done by “Gunboat diplomacy” –
how is this done more commonly today?

• What does it mean that liquidity was sucked

out of the global economy?
https://www.pbs.org/video/the-ascent-o
f-money-part-2-bonds-of-war/
• What is globalisation?
Timing: 44:49 - 52:55
 • In this example enforcement of debt and policy
was done by “Gunboat diplomacy” – how is this
Globalisation done more commonly today?
• Economic sanctions, tit for tat policy, issue linkage,…

• What does it mean that liquidity was sucked out of

https://www.pbs.org/v the global economy?
ideo/the-ascent-of-mo • The ability to borrow money or sell assets decreased as
ney-part-2-bonds-of- the expectation of a global war set in.
war/
• What is globalisation?

Timing: 44:49 - 52:55

Risk and - What is insurance?

Insurance
https://www.pbs.org/video/the-ascent-of
-money-part-3-risky-business/ - What is the difference between insurance and
hedging?
Timing: 0:00 - 2:30
 - What is insurance?

Risk and Insurance

- The party exposed to risk (the insured) shifts all or part of
the risk to the other party (the insurer) for a fixed and
https://www.pbs.or certain fee.
g/video/the-ascent- - Main feature: the expected revenue of the insured party
of-money-part-3-ri is lower with than without the insurance. But risk is
lower, and if the insured party is risk-averse, he/she will
sky-business/ find it profitable to insure.
- The insurer has a higher expected revenue, and higher
risk. A large insurance company is able, through a large
portfolio of independent risks, to rely on the law of large
numbers and (almost) eliminate risk. It is as if the insurer
Timing: 0:00 - 2:30 was risk neutral.
- Insurance does not work in case of aggregate risk (such
as natural disasters), since the insurance company finds it
difficult to eliminate risk through differentiation
 - What is the difference between insurance and
hedging?

- Hedging refers to the investment in alternative assests

who’s attached risk offsets the risk of the asset owned by
the investor

Risk and - It is mostly a bilateral contract, and does not eliminate

risk for the insurer through the law of large numbers.

Insurance
- It relies more on different expectations on the realization
of risk between the two parties
- It can be therefore used also in the presence of aggregate
risks (such as flooding)
- Example: I buy an asset that pays off only if the flood
occurs.
Risk and - What lessons can international businesses learn
Insurance from insurance around hurricane Katrina?
- Insuring yourself may not be sufficient to avoid risk,
especially when exceptional events occur, that bring in
extreme correlation of individual risks (e.g., the
pandemics)
https://www.pbs.org/video/the-ascent-of
-money-part-3-risky-business/

Timing: 3:25 - 11:21