Q3. Suppose an insurance company oers a standard insurance contract to all customers with a premium r = $200 and payout q = $1000. Then consider the following situations: i. Individual A has healthy state income IH = $1000 and sick state income IS = $0. His probability of illness p Does he face a fair and/or full contract? ii. 0.1. Individual B has healthy state income IH = $1000 and sick state income IS = $0. His probability of illness p = 0.2. Does he face a fair and/or full contract? %| %3D

A $150 eReader comes with a warranty from an electronics business that covers theft (T) and accidental damage (AD) . Due to the high expense of repairing an eReader, it is more cost-effective for the business to provide the customer a complete refund to go toward another one. There is a 5.1% possibility that an AD (Accidenal Claim) claim will be made in any given year. Assume there can only be one claim made (not one of each type).Customers who report an eReader as stolen will get a reimbursement for 80% of the item's full price. A Theft (T) claim is likely to be submitted 3.5% of the time in any given year.What is the anticipated financial benefit or loss for the firm on each contract if the warrantee costs $15.95 for a year?(NOTE: Keep in mind that regardless of whether a claim is made, the consumer will pay for the warranty upfront.)

2. If an insurance company issues a $200,000 five-year policy on a man whose probability of living for another five years is .994, what is the minimum that the expected cost to the company for this policy?

Suppose that Albert and Leo are in a contract dispute. Leo has breached their contract and this has resulted in damages of amount x to Albert. They can negotiate a settlement before they go to trial. If they settle, they divide the gain in total surplus from settling equally. Going to court costs each 1000 (and they are in the "American" system). Suppose that Albert anticipates that the court will find x to be 0 with probability and 20,000 with probability 4. Further, suppose that Leo anticipates that the court will find x to be O with probability ½ and 20,000 with probability %. Assume both Albert and Leo are risk neutral and motivated by their expected payoffs. Part A: Will Albert and Leo settle? If so, what is the outcome? If not, explain why. Part B: Suppose now that Albert believes the court will find x to be 0 with probability 1. Leo anticipates that the court will find x to be 0 with probability % and 20,000 with probability %. If Albert anticipates there is scope for settlement…

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An engineer decides to buy four new snow tires for his car. He finds that Retailer A is offering a special cash rebate, which depends on how much snow falls during the first winter. If this snowfall is less than 50% of the mean annual snowfall for his city, his rebate will bet 50% of the list price. If the snowfall that winter is more than 50% but less than 75% of the mean annual snowfall, his rebate will be 25% of the list price. If the snowfall is more than 75% of the mean annual snowfall, he will receive no rebate. The engineer finds from a reference book that the annual snowfall for his city has a mean of 80 cm and standard deviation of 20 cm and approximates a normal distribution. The list price for the brand and size of tires he wants is $80.00 per tire. The engineer checks other retailers and finds that Retailer B sells the same brand and size of tires with the same warranty for the same list price but offers a discount of 5% of the list price regardless of snowfall that…

1. ABC inc. stock is currently selling for $30, one year from today the stock price can either increase by 20% or decrease by 15%. The probability of an increase in the stock price is equal to 0.3. The one-year risk-free rate is 5% What is the value of a European put that expires in one year with an exercise price of $24. 2. Graphically, show the value and the profit and loss of the following butterfly position: Long in a call with an exercise price of $30, short in 2 calls with an exercise price of $45, and long in a call with an exercise price of 60. All calls are written on the same stock and have the same maturity. 3. "Early exercise of an American option on a stock that does not pay any dividend is not optimal regardless of whether the option is a Call or a Put". True, False, or Uncertain. Explain.

Person A faces a 60% chance of having no loss and a 40% chance of having a loss of $25. Person B faces a 60% chance of having no loss and a 40% chance of having a loss of $50. Question 1: Suppose Person A purchases full insurance for an actuarially fair premium (AFP) and Person A is the ONLY person in the insurer's risk pool. a. What is the actuarially fair premium (AFP) of full insurance for Person A? b. What is the amount of risk the insurer faces?

4. An insurance company sells an automobile policy with a deductible of one unit. Let X be the amount of the loss having pmf 0.9 f(x) = x = 0 x = 1,2,3,4,5,6 where c is a constant. a) Find c. b) Find the expected value of the amount the insurance company must pay.

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