Your firm will buy 470,000 barrels of oil three months from now. You hedge the oil price risk by buying oil call options that expire in three months. Each oil option contract is for 1,000 barrels. The option price is $6.50/ barrel. The exercise price is $55/barrel and the current spot price is $56/barrel. Find the total cost (including the hedge) of buying 260,000 barrels in three months if the spot price increases by 30%. What is the effective price per barrel? Explain why you are glad, or not glad, that you hedged. Show all steps including the payoff on the options.

Bill owns a building and wants to insure it for $5 million. He places $3.5 million with company A, $2 million with company B, and $0.3 million with company C. How much does he receive from each company if a $8 million loss occurs and there is a pro-rata liability provision in place? How much does he receive from each company if a $8 million loss occurs and there is a contribution by equal shares provision in place? show all work

A firm is insuring a house with an actual cash value of $200,000. They have insured this house for $185,000. How much would they receive from an insurer if a coinsurance clause is in place at the typical required rate and the loss is $175,000? How would the answer change if the house was insured for $150,000? show all work

Explain why ACV is determined by replacement cost minus depreciation for property. How does this relate to the principle of indemnity? How does this relate to the principle of subrogation?