Assume that your firm produces two commodities and the net returns from commodity is randomly distributed...

 

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Assume that your firm produces two commodities and the net returns from commodity is randomly distributed as: R₁-N (25000,5000) and R₂~N(30000,7500) with correlation P12 = 0.25. You are purchasing net return insurance policies at a coverage level of 85%. 1. Calculate the total insurance premium if you were required to insure each commodity separately. 2. Calculate the total insurance premium if you were allowed to insure them jointly i.c. insure 85% of R = R₁ + R₂ Assume that your firm produces two commodities and the net returns from commodity is randomly distributed as: R₁-N (25000,5000) and R₂~N(30000,7500) with correlation P12 = 0.25. You are purchasing net return insurance policies at a coverage level of 85%. 1. Calculate the total insurance premium if you were required to insure each commodity separately. 2. Calculate the total insurance premium if you were allowed to insure them jointly i.c. insure 85% of R = R₁ + R₂

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SOLUTION 1 To calculate the total insurance premium if each commodity is insured separately we need to calculate the insurance premium for each commod... View the full answer