Casualty Actuarial Society (CAS) Practice Exam

Speculative risk is associated with the possibility of either gain or loss, as opposed to pure risk, which only involves the potential for loss. The two factors that significantly affect speculative risk are price risk and credit risk.

Price risk pertains to the likelihood of financial loss due to changes in market prices of assets, which can directly impact investments and profitability. For instance, fluctuations in stock prices or commodity values can lead to significant gains or losses, making it a crucial factor in evaluating speculative risks.

Credit risk involves the potential that a borrower or counterparty will fail to meet their obligations in accordance with agreed terms. This risk can affect financial transactions and investments heavily, as defaults can lead to substantial financial losses, particularly in high-stakes trading or lending scenarios.

Together, these two factors contribute to the assessment and management of speculative risk in various financial sectors, highlighting their importance in this context.