Risk HW 4 - Notes for Mccloskey PDF

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Notes for Mccloskey...

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1A. Options

70%

15%

9%

4%

2%

E.C.

1

0

4,000

8,000

9,250

11,500

$1,920

2

1800

1,850

1,850

1,850

1,850

$1,814

(PL + Prevention)

(Premium + deductible + LP)

2200

2,200

2,200

2,200

2,200

$2,200

1900

2,075

2,075

2,075

2,075

$1,925.50

(Premium)

(Premium + Deductible)

2,775

2,775

2,775

$1,935

2,200

2,200

2,200

$2,060

3

(Premium)

4

5

1575

2,775

(PL + Prvention)

(PL + PD)

6

2000

2,200

(Premium)

(Premium + Deductible)

1: (0 x 0.70) + (4000 x 0.15) + (8000 x 0.09) + (9250 x 0.04) + (11500 x0.02) = $1,920 2: (1800 x 0.72) + (1850 x 0.17) + (1850 x 0.07) + (1850 x 0.03) + (1850 x 0.01) = $1,814 3: (2200 x 0.70) + (2200 x 0.15) + (2200 x 0.09) + (2200 x 0.04) + (2200 x 0.02) = $2,200 4: (1900 x 0.70) + (2075 x 0.15) + (2075 x 0.09) + (2075 x 0.04) + (2075 x 0.02) = $1,925.50 5: (1575 x 0.70) + (2775 x 0.15) + (2775 x 0.12) + (2775 x 0.02) + (2775 x 0.01) = $1,935 6: (2000 x 0.70) + (2200 x 0.15) + (2200 x 0.09) + (2200 x 0.04) + (2200 x 0.02) = $2,060

1B. If the risk manager makes a decision based on the total cost, then the risk manager should choose option 3 because it has the lowest total cost. P*

W.V.

T.C.

(1) 1,920

750

$2,670

(2) 1,814

600

$2,414

(3) 2,200

0

$2,200

(4) 1,952.50

550

$2,502.50

(5) 1,935

500

$2,435

(6) 2,060

440

$2,500

2A. 1065 + WV (F) < $825 + WV (P) 1065 + 0 < 825 + WV (P) 1065 – 825 < 0 + WV (P)

If WV (P) > $240 : Manager will choose full insurance. If WV (P) < $240 : Manager will choose partial insurance. If the WV (P) = $240 : Manager would be indifferent 2B. 980 + WV (D) < 600 + WV (R) WV (R) – WV (D) < 980 – 600 WV (R) – WV (D) 380 < 380

WV (R) – WV (D) > $380: Manager will choose deductible WV (R) – WV (D) < $380 : Manager will choose retention WV (R) – WV (D) $380 = : Manager will be indifferent...