Question

Global Gas International offers to contract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans that will provide Halidurton ​$600 million in income. The probability that the oil pipeline will​ leak, causing environmental damage is theta. If​ so, the legal liability will be ​$1 comma 200 million. If Halidurton is risk neutral and liable for the damages from a​ leak, what is the theta such that it is indifferent between accepting and rejecting the​ contract?

Answer 1

probability that make risk neutral accepting project <
`(1)/(3)` or 33.33 %

Explanation:

given data

income = $600 million

legal liability = ​$1,200 million

to find out

what is the theta such that it is indifferent between accepting and rejecting the​ contract

solution

we know here that risk neutral between accept and reject contract θ value will be as that when net present value NPV of contract = 0

so

we can say NPV > 0

so ( 1- θ ) $600 Million + θ ( $1200 Million) > 0

$600 Million > $1800 θ

θ <
`(1)/(3)` = 33.33 %

so probability that make risk neutral accepting project <
`(1)/(3)` or 33.33 %