Use the Information for the Question(s)below

question 17

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 -1.2, what is the actuarially fair insurance premium?

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

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Definitions:

Somatic Nervous System

A part of the peripheral nervous system that controls voluntary movements of the body and transmits sensory information to the central nervous system.

Spinal Reflex System

A part of the nervous system responsible for reflex actions, which are automatic and involuntary responses to stimuli, processed through the spinal cord.

Parasympathetic Nervous System

A division of the autonomic nervous system that conserves energy as it slows the heart rate, increases intestinal and gland activity, and relaxes sphincter muscles in the gastrointestinal tract.

Sympathetic Nervous System

Part of the autonomic nervous system that prepares the body for physical activity by accelerating the heart rate, constricting blood vessels, and raising blood pressure.