Use the Information for the Question(s)below

question 37

Multiple Choice

Use the information for the question(s) below.
Your firm faces a 6% chance of a potential loss of $45 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 $350 000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-An operator of an oil rig 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)$2 314 815
• B)$2 550 000
• C)$2 450 980
• D)$2 500 000

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Definitions:

Income

The financial gain or money received by an individual or entity, typically through wages, investments, or business operations.

Normal Goods

Goods for which demand increases as the income of the consumer increases.

Current Consumption

The portion of income or wealth that is spent on goods and services in the present, as opposed to saving for future expenditure.

Future Consumption

The saving or postponing of consumption today in order to consume in the future, often considered in economic theories of savings and investment.