Caculate expected value of profit made by insurance company

Reference no: EM13113181

Darwin Head, a 35 year old sawmill worker, won $1 million and a Chevrolet Malibu by scoring 15 goals within 24 seconds at the Vancouver Canucks National Hockey League Game. Head said he would use the money to pay off his mortage and provide for his children. and he had no plans to quit his job. The contest was part of the Chevrolet Malibu Million Dollar Shoutout, sponsored by Geneal Motors Canadian Division. Did GM Candada risk $1 million? No, GM Canda purchased event insurance from a company specializing in promotions at sproting events sucah as a half court basketball shot or a hole in one giveaway at the local charity golf outing. The event insurance company estimates the probability of a contest winning the contest, and for a modest charge, insures the event. The promoters pay the insurance premium but take on no added risk at the insurance company will make the large payout in the unlikely event that a contestant wins. To see how it works suppose that the insurance compnay estimates that the probability a contestant would win a Million Dollar Shootout is 0.001, and that the insurance company charges $4000.

a. Caculate the expected value of the profit made by the insurance company.

b. Many call this kind of situation a win win opportunity for the insurance company and the promoter. Do you agree? Explain

Reference no: EM13113181

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