Use the Information for the Question(s)below

question 29

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 -1.2, what is the actuarially fair insurance premium?

• A)$2,500,000
• B) $2,637,131
• C)$2,550,000
• D)$2,753,304

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Definitions:

Nasogastric (NG) Tube

A flexible tube passed through the nose and into the stomach for feeding or medication administration in patients unable to eat by mouth.

Bowel Obstruction

A medical condition where there is a blockage in the intestines, preventing the normal flow of contents through the digestive system.

Gomco

A device commonly used in the circumcision of infants, known as the Gomco clamp.

Asthma Bronchoconstriction

A characteristic feature of asthma involving the tightening of the muscles around the airways, leading to breathing difficulties.