Christina S. & Raiyana K. imports goods from the U.S. The owners (C&R) worried that Canada-USA trade negotiations could break down next year, leading to a suspension on imports. In the event of a suspension, C&R firm expects its operating profit to drop substantially and its marginal tax rate to from its current level of 35% to 10%. An insurance company, owned by two old friends Khawaja Q. & Doris Z. (KD) has agreed to prepare a trade insurance policy that will pay $500,000 in the event of an import suspension. The chance of a suspension is estimated to be 10%, with a beta equal to -2.0. Let assume that the risk-free rate is 7% and the expected return of the market is 17%.(Show Calculations).

a.What is the actuarially fair insurance premium for this insurance?

b.What is the NPV of purchasing this insurance for your firm? What is the source of this gain?