Multiple Choice, Choose the correct answer and give a brief explanation of the correct answer.

1. An investment company plans to invest in three different policies with a given proposal of variant risk but the same return. Suggest if the inflation rate is continuously increasing what should the company inherit as the policy.

a) Invest in the one with least risk and expect the market condition to become better.

b) Make the least possible investment as the inflation rate is suggesting increasing lower return

c) Make the allocative mix of investments that will bring in the best possible return and assign the investments in the orders of greater return with least risk.

2. Due to increasing inflation rate, it found that most organizations are planning to withheld more working capital in their firms and would hold capital for longer period. Under these circumstances, suggest how the CDS should be priced, the investor is planning to invest as an option.

a) CDS should be priced according to their prior contract as the insurance payment increase would drive away CDS purchasers.

b) CDS should priced based on the increasing inflation rate with least possible increment possible as it would be beneficial for both the insurance companies and the purchasers of the contractors.

C) CDS is the derivative that provides insurance risk to a contract for the purchaser at the exercise date. If the contract gets violated because of changed situation of inflation then it should be rearranged and remodified.