Question
Hello Kitty Corp is worried that trade relations between Venezuela and Canada might deteriorate. In the event of a Venezuelan trade moratorium, it expects its
Hello Kitty Corp is worried that trade relations between Venezuela and Canada might deteriorate. In the event of a Venezuelan trade moratorium, it expects its marginal tax rate to fall from 40% to 15%. An insurance company agrees to write a policy that will pay $550,000 if there is a moratorium. The probability of a trade moratorium is 3%, with a beta of -0.225. The risk free rate is 5% and the market risk premium is 4%. What is the NPV of purchasing this policy? (Assume that premium is paid at the beginning of the year but insurance pays at the end of the year.)
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