Major damage in the united states

Reference no: EM131009191

A hurricane bond pays the holder a face amount, say +1 million, if a hurricane causes major damage in the United States. Suppose that the chance for such a storm is 5% per year.

(a) If a financial firm sells these bonds for +60,000, what is the chance that the firm loses money if it only sells one of these?

(b) If the firm sells 1,000 of these policies, each for +60,000, what is the probability that it loses money?

(c) How does the difference between the probabilities of parts (a) and (b) compare to the situation of a life insurance company that writes coverage to numerous patients that live or die independently of one another?

Reference no: EM131009191

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