Q1 Apply the concept of financial risk management to the article below.

Q2 Is the insurance contract a derivative? Explain. If it is a derivative, then what type of derivative would we classify it as? Explain.

Q3 Assume that in 2020, the university realised a drop in revenue of 50%. The business and the engineering schools have a combined revenue decrease of 45%. Of this decrease, 37% is revenue lost from fewer Chinese students enrolling in the two schools. Would the policy be triggered in 2020? Calculate the total amount of premiums paid by the two schools. If the policy is triggered, what is the total insurance payout?

Q4 Identify another possible alternative other than the insurance contract that the University could have used to hedge their risk of an over-reliance on Chinese students. Explain how this alternative strategy would work and how it would hedge the risk. Discuss the pros and cons of this approach in comparison to the insurance option.

"A school took out an insurance policy 2 years ago to make up for losses for a decline in students. They have grown dependent on the 360,000+ Chinese students who study in the U.S. each year paying full tuition and costs. Chinese students make up 20% of the colleges 3,000~ grad students and pay tuition rates that are sometimes 50% or higher than what in-state students pay. The policy has $61 million coverage, equal to the total revenue from Chinese students, and costs $424,000 a year in premiums. Its triggered if the two schools have a combined revenue decline of at least 18.5% from a loss in Chinese students. The payout is proportional to the decline so if there is a 20% decline in Chinese-student revenue, the insurance pay out would be about $12 million. If the numbers fall by half, the payout is about $30 million. The number of Chinese students attending the university fell for the first time last year, to 5,797 from 5,932 the year prior. Many other schools are now considering insurance policy, but they have become far more expensive after the trade war. And so far, no other universities appear to have purchased one."