Exam 25: Insurance and Risk Management

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%. -If your firm is uninsured, the NPV of implementing the new safety policies is closest to ________.

What are some of the disadvantages of long-term supply contracts?

An interest rate that adjusts to current market conditions is called a(n)________.

Which of the following statements is FALSE?

To protect the firm against the loss of earnings if the business operations are disrupted due to fire, accident, or some other insured peril a firm would purchase ________.

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%. -Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production. In the event of a drought, Farmville Industries anticipates a loss of $75 million. Suppose the likelihood of a drought is 10% per year, and the beta associated with such a loss is 0.4. If the risk-free interest rate is 5% and the expected return on the market is 10%, then what is the actuarially fair insurance premium?

Which of the following statements regarding long-term supply contracts is FALSE?

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%. -What is the actuarially fair cost of full insurance?

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?

Which of the following statements is FALSE?

What is the duration of a five-year zero-coupon bond?

Which of the following statements is FALSE?

The duration of a five-year bond with 8% annual coupons trading at par is closest to ________.

A manufacturer of breakfast cereal is concerned about corn prices. The firm anticipates needing 1 million bushels of corn in one month. The current price of corn is $6.50 per bushel and the futures price for delivery in one month is $7.00 per bushel. The cost to store the corn for 1 month is $100,000. What should the firm do?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Firms use all of the following for reducing their exposure to commodity price movements EXCEPT ________.

A steel maker needs 5,000,000 tons of coal next year. The current market price for coal is $70.00 per ton. At this price, the firm expects its EBIT to be $500 million. What will the firm's EBIT if the firm enters into a supply contract for coal for a fixed price of $72.00 per ton?