9C

Globe Metal imports ore from Australia. Assume that it is 2017 and Globe Metal is worried that the Australian mines may enter into a long-term contract with the German to sell all of their ore output to Germany, hence cutting off Globe Metal's supply. In the event of such a contract with the German, Globe Metal will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 40% down to 20%. An insurance firm has agreed to write a trade insurance policy that will pay Globe Metal $3,000,000 in the event of the Australian supply of ore being cut off. The chance of the Australian supply being cut off is estimated to be 25%, with a beta of -1.5.0. The risk-free rate of interest is 5% and the return on the market is estimated to be 15%.

What is Globe's NPV for purchasing this policy? Show your calculations.