Risk & Uncertainty - Microeconomics 3rd Year Essay

Risk & Uncertainty - Microeconomics 3rd Year - Essay Example The expected utility function has some very convenient properties of analysing choice under uncertainty. Since to insure or not to insure is a choice we can apply it to an insurance problem. Indifference curves is used to measure utility or level of satisfaction as will be seen later. An individual’s certainty equivalent (CE) of a lottery is the amount of money that the individual is willing to pay to avoid the risk of the lottery i.e. to get the expected value (EV) instead of the lottery. For a risk averse individual CE 0 for all lottery. In the real world insurance is not actuarially fair. In the previous example it was assumed that the insurance did not charge anything to cover operating expenses or to allow for profit. In the cases that follow a loading factor is added to cover operating expenses and thus makes insurance actuarially unfair. This implies that ∠ > EV of the insurance benefit. The options available to the individual is a lower line with slope = p1/p2. At the initial point E is larger and therefore the line is lower. An indifference curve through the original point yields the diagram above (right). In diagram above (right) E (fixed loading) is larger this implies x = 0 with fixed loading and the optimal choice is no insurance in this case as the indifference curve lies above the actuarial line which is suggestive that it does provide the level of utility required by the individual. It is optimal for the consumer to choose F where w – (1 + m)px = w – L + x – px –mpx which implies x = 1 (representative of full insurance). A fair line F implies that an indifference curve is tangent to the line at F. see diagram (left)

Letters of credit have been described as the lifeblood of Essay

Letters of credit have been described as the lifeblood of international commerce. (Kerr LJ in RD Harbottle (Mercantil) Ltd v N - Essay Example The slightest delay can lead to huge loss due to exchange fluctuations during the period delay. There are instances of huge losses in the international trade by way of exchange fluctuations alone. This paper will examine the indispensability of the instrument so as to be called the life-blood of international commerce In RD Harbottle (Mercantil) Ltd v National Westminster Bank Ltd,2 the court has emphatically stated that there should not be the least interference of the courts in the letter of credit transactions as it is indispensable for the smooth flow of international commerce. Except in cases of frauds of which banks have notice, the irrevocable obligations under a letter of credit cannot be undone by the parties for reasons of any dispute between them. Court are not concerned with their difficulties however great they may be as they can always settle their disputes in a different forum without disturbing the operation of letter of credit which is a banking system at a different level. This is the essence of the court’s ruling in the above case. ... The issuing bank has just to make sure the documents submitted by the beneficiary are in strict compliance of the credit terms and nothing more. In view of this, neither the applicant (buyer) nor the beneficiary (seller) can frustrate the letter of credit payment under some pretext or other. It is because the credit is a stand -alone document like a legal tender 3 and its validity cannot be questioned lest the international commerce will lose confidence in the system with the resultant collapse of the international trade. This, Donaldson LJ characterizes as ‘thrombosis will occur if , unless fraud is involved, courts intervene and thereby disturb the mercantile practice of treating rights thereunder [of letter of credit] as being equivalent to cash in hand’4 (foot note 5 begins) Further, letter of credit is part of commercial law to facilitate commerce. The rules must therefore be consistently followed by the courts without giving way to the idiosyncrasies of individuals though courts’ view of the will change overtime. Only then, outcome of a dispute can be predicted with a law that is clear and consistent so that litigation is avoided. If it is unavoidable, it should be quickly resolved especially in a price/exchange fluctuation market. The court’s approach in RD Harbottle is to ensure certainty for documentary credit which is an assurance from bank for payment against presentation of documents. Though the term UCP needs to be incorporated in a documentary credit contract, courts have the liberty to view it as impliedly incorporated even in the absence of the express provision of the UCP.5 Therefore principles such as doctrine of strict compliance, party’s autonomy and fraud