Your firm imports manufactured goods from China. You are worried that U.S.—China trade negotiations could break down next year, leading to a moratorium on imports. In the event of a moratorium, your firm expects its operating profits to decline substantially and its marginal tax rate to fall from its current level of 30% to 0%. An insurance firm has agreed to write a trade insurance policy that will pay $600,000 in the event of an import moratorium. The chance of a moratorium is estimated to be 10%, with a beta of -1.2. Suppose the risk-free interest rate is 6% and the expected return of the market is 10.5%.

a. What is the actuarially fair premium for this insurance?

b. What is the NPV of purchasing this insurance for your firm? What is the source of this gain?