None In calculating insurance premiums, the actuarially fair insurance premium is the premiumthat results in a zero NPV for both the insured and the insurer. As such, the present valueof the expected loss is the actuarially fair insurance premium. Suppose your companywants to insure a building worth $410 million. The probability of loss is 1.37 percent inone year, and the relevant discount rate is 4.4 percent.a. What is the actuarially fair insurance premium? (Do not round intermediatecalculations and enter your answer in dollars, not millions of dollars, rounded tothe nearest whole number, e.g., 1,234,567.)b. Suppose that you can make modifications to the building that will reduce theprobability of a loss to .95 percent. How much would you be willing to pay for thesemodifications? (Do not round intermediate calculations and enter your answer indollars, not millions of dollars, rounded to the nearest whole number, e.g.,1,234,567.)a. Insurance premiumb. Maximum cost

a. The actuarially fair insurance premium is the present value of the expected loss. The expected…

Answered: In calculating insurance premiums, the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 8QTD

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In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected loss is the actuarially fair insurance premium. Suppose your company wants to insure a building worth $390 million. The probability of loss is 1.29 percent in one year, and the relevant discount rate is 3.1 percent. a. What is the actuarially fair insurance premium? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. Suppose that you can make modifications to the building that will reduce the probability of a loss to .80 percent. How much would you be willing to pay for these modifications? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) a. Insurance premium b. Maximum cost
There is a loss, with 1% probability of default, expected to be between $50 million and $200 million, with equal probability of loss in that range. Determine the fair price of insurance to protect the institution against a loss of over $130 million for this risk.
An survival model is given by the survival function S₁(x) = e Suppose a whole life insurance policy with a benefit of $118250 payable immediately at the time of death of the insured life has a continuously compound interest rate 8 -0.026. (a) What is the present value for the benefit if the policy is purchased at age 42? EPV = $ a= 0.0008 (b) What is the standard deviation of the present value of this insurance benefit if the policy is purchased at age 42? Note: Round your answer to two decimal places.
Assume you have the following asset and liability in your balance sheet Asset - Bond AModified Duration = 1.5 yearsValue = RM1 million Liability - Bond BModified Duration 2.6 yearsValue = RM2 million a. Calculate the duration gaps?b. What is the expected change in Net worth if interest increases by 1%?c. What should or could you to achieve immunised balance sheet?
Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? Assume previous interest is 10% c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.
Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.
Assume you have the following asset and liability in your Balance Sheet:Asset - Bond AModified Duration = 2.6 yearsValue= RM1.5 millionAAFARLiability - Bond BModified Duration = 3.1 yearsValue= RM1.0 milliona. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%?attachment. calculation step by step
1. What is the different between an ordinary annuity and an annuity due? Which occursmore in practice? Give a common example of both. 2. Using the example of a savings account, explain the difference between the effectiveannual rate and the annual percentage rate. 3. A mortgage instrument pays $1.5 million at the end of each of the next two years. Aninvestor has an alternative investment with the same amount of risk that will payinterest at 8% compounded semiannually. what the investor should pay for themortgage instrument?
D3) The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $5. The value of a derivative that pays off $100 after one year if a company has not defaulted is $97. (a) What is the risk-free rate? (b) What is the risk-neutral probability of default?
If Po is the initial price of the security, P₁ is the price after you hold it for a year, and X represents a direct payment, an asset's rate of return is equal to: rate of return = (P₁ - Po) rate of return = (P₁ - Po) + X rate of return = (P₁-Po) / Po + XPo rate of return = (P₁ - Po)/Po + X
You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT? a. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. b. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. c. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. d. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
Consider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $x million is 1-x. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan. b) Compute the 1-year 99% VaR and ES for the portfolio of both loans. c) Does the VaR and the ES satisfy the subadditivity property in this case?

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