You are about to embark on a project that has an equal 50% probability of generating a $10,000 windfall or a loss of $4,000.However,an insurance company comes to you saying they will sell you an indemnification policy for the event that you incur the $4,000 loss.If the insurance company is basing their charge for the policy on real option analysis,what will they charge you for the policy?

Question

Quizplus · Accepted Answer

No policy value: .5(10,000 - 4,000)= 3,000
With policy value: .5(10,000)= 5,000
Value of option to eliminate negative value: 5,000 - 3,000 = 2,000

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