3 Your Firm Imports Manufactured Goods From China You Are Worried That U S China Trade Negotiations Could Break Down 1 (29.9 KiB) Viewed 127 times
3 Your Firm Imports Manufactured Goods From China You Are Worried That U S China Trade Negotiations Could Break Down 2 (29.9 KiB) Viewed 127 times
3. Your firm imports manufactured goods from China. You are worried that U.S. China trade negotiations could break down next year, leading to a maratorium 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 -Bono gala?
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