Question 4: Option Price Calculation (35 points) (a)(5 pts) Define option price. Explain why the option price of a policy might differ from the expected surplus generated by the policy. (b)(5 pts) Define option value. Suppose that a public project is increasing the risk faced by farmers, but the expected income of each farmer does not depend on whether the project is undertaken or not. Let farmer A be risk averse and farmer B be risk neutral. Compare their option values. Now consider the following project: Construction of a Dam. The only person affected by this project is a farmer, with utility U(I) where $I is his income. There are two possible contingencies: it rains a lot (Wet) or it does not rain a lot (Dry). With the Dam, his income is $1000 if Wet and $900 if Dry. Without the Dam, his income is $500 if Wet and $300 if Dry. The probability of raining a lot is 50%. (c)(5 pts) What is the expected surplus of the farmer

The u.s. stock market has returned an average of about 9% per year since 1900. this return works out to a real return (i.e., adjusted for inflation) of approximately 6% per year. if you invest $100,000 and you earn 6% a year on it, how much real purchasing power will you have in 30 years?

When paul o’neill joined alcoa as ceo, he set a , that there would be zero workplace accidents. a lot of people in the organization thought this was impossible given how dangerous some aluminum-manufacturing jobs are, but alcoa’s safety record improved tremendously. as the board of governors of the american red cross considers planning, one option is to make strategic plans and then direct managers to align tactical and operational plans accordingly. another option is to have planning specialists managers across the organization make their own plans. why might this organization’s executives opt for the latter approach? check all that apply. (a) the environment is a dynamic one, and department and frontline managers can come up with more responsive plans than can central leadership. (b)resources will be better coordinated across the organization in support of the overall strategy.(c) senior leadership will have more control over the organization’s direction. (d)when managers come up with their own plans, they are likely to be more committed to following through on them.

Schuepfer inc. bases its selling and administrative expense budget on budgeted unit sales. the sales budget shows 1,800 units are planned to be sold in march. the variable selling and administrative expense is $4.30 per unit. the budgeted fixed selling and administrative expense is $35,620 per month, which includes depreciation of $2,700 per month. the remainder of the fixed selling and administrative expense represents current cash flows. the cash disbursements for selling and administrative expenses on the march selling and administrative expense budget should be: