Use the Information for the Question(s)below

question 2

Multiple Choice

Use the information for the question(s) below.
Your firm faces an 8% chance of a potential loss of $50 million next year. If your firm implements new safety policies, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $250,000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-An operator of an oil well has a 0.5% chance of experiencing a catastrophic failure. This failure will cost the operator $500 million. If the risk-free rate is 2%, the expected return on the market is 8%, and the beta of the risk is 0, what is the actuarially fair insurance premium?

• A)$2,450,980
• B)$2,500,000
• C)$2,550,000
• D)$2,314,815

---

Definitions:

Jeannette Rankin

The first woman ever elected to the United States Congress, serving as a Representative from Montana and a lifelong advocate for peace and women's rights.

Woman

An adult female human being.

Congress

is the legislative branch of the United States federal government, composed of two houses: the Senate and the House of Representatives.

Peace Ship

Henry Ford's 1915 initiative to send a ship to Europe carrying American activists in an effort to negotiate an end to World War I; it was met with skepticism and did not achieve its goal.