Question

A company is evaluating the use of insurance to mitigate its risk in the event of a market downturn. The company estimates that it has a total risk of 20% impact to its net income if a market downturn occurs, and the company currently has a net income of $150,000. At what cost should the company take out insurance to mitigate this risk?

Answer 1

Available Options are:

a. $25,000 premium

b. $100,000 premium

c. $150,000 premium

d. $200,000 premium or above

Answer:

Option A. $25,000 Premium

Step-by-step explanation:

The risk of loosing 20% of the company net income would be = $150,000 * 20% = $30,000

Now this is the highest cost the company could bear to insure the 20% downturn in the market. The cost below $30,000 amount available in the option is $25,000 is the right option here.

Hence Option A is correct.