Suppose that your firm's (pre-loss and pre-tax) earnings one period from now will be $1,000.
However, earnings are subject to the following loss distribution:

 
B. What is the net present value of purchasing an actuarially fair, full coverage insurance policy.

Transcribed Image Text:

Loss (Ls) $1,000 $600 $300 $0 Probability (ps) 20% 20% 20% 40% Loss (Ls) $1,000 $600 $300 $0 Probability (ps) 20% 20% 20% 40%

Answer rating: 100% (QA)

The insurance policy will cover the entire loss if the firm has a loss and will not ... View the full answer