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On January 1 2007, the Florida Property Company purchases a one-year property insurance policy with a deductible of $50,000. In the event of a hurricane, the insurance company will pay the Florida Property Company for losses in excess of the deductible. Payment occurs on December 31 2007. For the last three months of 2007, there is a 20% chance that a single hurricane occurs and an 80% chance that no hurricane occurs. If a hurricane occurs, then the Florida Property company will experience $1000000 in losses.

The continuously compounded risk free rate is 5%. On October 1 2007, what is the risk neutral expected value of the insurance policy to the Florida Property Company?

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Operation Management, Management Studies

Category:- Operation Management
Reference No.:- M92501036

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