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

---

Definitions:

Interest Calculations

The process of determining the interest earned or paid over a specific period of time based on the principal amount and the rate of interest.

Journalize

The process of recording transactions in a company's journal as part of the accounting cycle.

Maturity

The date on which the principal or final payment is due on a loan or security.

Social Security Tax

A mandatory contribution imposed by governments to fund public programs that provide retirement benefits, disability income, and other social security services.