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# Stock insurance: is it worth a one-time premium payment?

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The stock price of KLM is currently at \$30 per share. Assume that over 3 months, it can either go up by 20% or down by 20% and that interest rates are at 6% p.a. A friend of yours owns 5,000 shares of KLM that is held in trust and which he cannot sell for another six months. As he is looking to put a down payment on a home he wants to buy in six months, he wants to protect the value of his holding from falling below \$120,000 and has come to you for advice. It seems that a financial institution is willing to provide him with the required insurance for an up-front one-time premium payment of \$4,500.

What should he do?

#### Solution Preview

Solution:
To calculate the worth of insurance provided by the financial institution, consider a six-month European put option with a strike price of \$24. The risk-free rate is 6%. First, calculate the risk-neutral probability of a 20% rise in the first quarter.

S0 = 30 X = 24 u ...

#### Solution Summary

The solution discusses a question regarding stock insurance, to see if it is worth a one-time premium payment.

\$2.19

## Distributive Justice Theory and other in 17 multiple choice questions

1) Peter runs an auto air conditioning repair shop, because of the phase-out of the ozone-depleting refrigerants used in older auto air conditioners, auto air repairers have become subject to numerous new laws and regulation, some of which are costly and burdensome with which to comply. Although it cost him more, Peter decides to follow all the statutes and regulation so long as everyone else does the same. Peter has reached his decision in accordance with:
A) ethical relativism
B) utilitarianism
C)ethical fundamentalism
D) Kantian ethics
E) Rawls distributive justice theory

2) Henry purchase an insurance policy under which he pays annual premium for his entire life, but ending at age 65. If he pays all the premiums then he is covered for his entire life , and can receive a fixed amount of cash monthly for the remainder of life after 65. What type of policy is that
A) Term life
B) Whole life
C) An annuity
D) Indemnity life
E) Universal life

3) Which of the theories of the social responsibility of business includes obligations of a business to parties other than shareholders?
A) Corporate citizenship only
B) Moral minimum and stakeholder interest
C) Stakeholder interest only
D) Stakeholder interest and corporate citizenship
E) Moral minimum, stakeholder interest, and maximizing profits

4) Which of the following is true when someone accidentally makes an improvement to the personal property of another where the owner was unaware of the improvement until after it had been made?
A) The property owner gets to keep the improvement in all cases, but must pay the party who improved it the reasonable value of the improvement.
B) The party who made the improvement can remove it if this is possible, otherwise the owner of the property gets to keep the improvement and is not required to pay for it.
C) The property owner gets to keep the improvement in all circumstances and is not required to pay for it.
D) The party who made the improvement can remove it if this is possible, otherwise the owner of the property gets to keep the improvement and must pay the party who improved it the reasonable value of the improvement.

5) The procedure that an accountant performs to determine whether the financial statements of a business are materially accurate is a(n):
A) review.
B) verification.
C) audit.
D) compilation.
E) account sampling.

6) What is the difference between an administrator and an executor?
A) Administrators distribute real property and executors distribute personal property.
C) Administrators are used for per capita distributions and executers are used for per stirpes distributions.
D) Administrators are appointed by the court and executors are named in the will.
E) Executors are used where the decedent has surviving children under age 18 and administrators are used where the decedent has no surviving children under age 18.

7) Can the holder of a life estate mortgage his life estate?
A) No, because of the uncertainty over how long the interest will last.
B) Yes, so long as the mortgage term is limited to the length of the life estate.
C) Yes, but only if the holder of the remainder interest or reversion also simultaneously mortgages that interest.
D) No, because a life estate is not real property.
E) Yes, with the only restrictions being those applicable to a mortgage of a fee simple interest.

8) The holder of a life estate can do all of the following with her life estate except:
A) give it away.
B) leave it to someone in her will.
C) sell it.
D) mortgage it.
E) lease it to another.

9) Father transfers realty to his three children as tenants in common. This means that:
A) the children own the property with rights of survivorship.
B) each child owns a life estate; reversion to father.
C) only on child may possess that property at any one time.
D) each child has an undivided one-third interest in the entire property.
E) each child owns a specific one-third of that property.

10) The theory of business social responsibility that holds that a business owes duties solely to produce the highest return for its shareholders is:
A) the social audit theory.
B) the corporate citizenship theory.
C) the maximizing profits theory.
D) the moral minimum theory.
E) the stakeholder interest theory.

11) Mark owns a lot where he would like to build a duplex, but the zoning ordinance only allows single-family homes. Mark believes that he should be able to build a duplex because his lot is larger than most in the neighborhood. In addition, Mark's land is worth less if only a single-family home can be built on it. Mark can:
A) apply for a variance that would allow him to build contrary to the zoning regulations.
B) build the structure because it would not impose an undue hardship on the neighborhood and then apply for a special use permit once it was completed.
C) sue the city on the grounds that the ordinance is a private nuisance as it applies to Mark.
D) sue the city on the grounds that the zoning ordinance amounts to a taking because it reduces the value of his land.
E) A and D.

12) Which of the following statements is true regarding the relationship of law and ethics?
A) In some cases the law will require a higher standard of conduct than ethics, but never vice versa.
B) Depending on the circumstances, the law can require a higher, lower, or the same standard of conduct as ethics demands.
C) In some cases ethics will require a higher standard of conduct than the law, but never vice versa.
D) The legal requirements will almost always be the same as the ethical requirements because the law is based on the ethical standards.

13) Under an automobile insurance policy, what does comprehensive coverage protect against?
A) All types of damage to the covered vehicles of the insured.
B) Coverage for all losses in connection with the vehicle of the insured that are caused by other parties.
C) All types of damage to the covered vehicles of the insured except for damage caused by collision.
D) All types of losses caused by the insured to other parties.
E) All types of loss in connection with the ownership and operation of a vehicle.

14) Kathy needs to drive to a city some distance away. Kathy's car is in for repairs, so Kathy borrows Gloria's car at no charge. While Kathy is driving on the highway, one of the tires comes off the car, Kathy crashes, and is seriously injured. Gloria did not know of the defect, but a reasonable inspection would have indicated that a repair was needed. Kathy sues Gloria. In this situation:
A) Gloria is not liable because this is a lease and not a bailment.
B) Gloria is not liable because she did not charge Kathy for using the car.
C) Gloria is liable because she should have discovered the defect by inspection.
D) Gloria is not liable because she did not know of the defect.
E) Gloria is liable because she is an insurer of Kathy's safety.

15) If an auditor determines that the financial statements fairly present the financial results and position of the client except for one fairly minor, but material, item that is not properly presented, the auditor would issue a(n):
A) unqualified opinion.
B) qualified opinion.
D) disclaimer of opinion.

16) The Foreign Corrupt Practices Act prevents each of the following except:
A) bribes to candidates for office in foreign nations.
B) bribes to foreign officials.
C) bribes to foreign political party officials.
D) bribes to foreign officials if the payment is legal under the local written laws.

17) The moral theory of ethical relativism can best be characterized by:
A) the belief that the moral rules should be determined by persons who have a "veil of ignorance" about their place or station in society.
B) the belief that a person must decide what course of action is proper based on that person's own set of beliefs or feelings.
C) the consultation of an outside source, such as a book or person, for guidance.
D) a set of universal rules based on reasoning that must be applied in all situations and is characterized by reversibility.
E) determining which course of action produces the greatest amount of good for the greatest number of people.

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