Homework 4
This is a large homework, counting 3 times as much as a small homework.
I must receive email with link to your answers by 9:00 PM on September 17, 2013.
Name:_____________________________________
Instructions:
Complete the homework in a Word document, typing your answer to each question and embedding your histogram into the Word file. Then save that file as a pdf. Upload this pdf file to your Google Drive (accessible via your gmail account), share that document with me by emailing me the link (bailey.norwood@gmail.com). Once you have emailed me this link you have fully submitted your homework.
This video, also embedded below, contains a short tutorial on saving Word documents as pdf files and then sharing the file using Google Drive.
Tutorial on saving Word documents as pdf files and then sharing using Google Drive
(A) Crop Insurance for Cotton in S.C.
(A1) [worth 10 points] Download cotton yield data for S.C. between 1953 and 2006. Ignore the variable Time Trend. Create a clear and attractive histogram for the yields, following the directions given in Video 3—How To Construct a Histogram in Chapter CN.1 Note that you must decide the appropriate bins to use. This histogram will be graded in considerable detail.
(A.2) [worth 2 points] Suppose you work for an insurance company that sells policies which pay farmers $1,000 whenever yields are 400 lbs per acre or less. The yield is per acre, and the indemnity of $1,000 means the farmer will get $1,000 for every acre enrolled in the insurance policy. Based on your histogram, what is the breakeven premium for this policy?
(A.3) [worth 2 points] If your company charges a premium 20% higher than the breakeven premium, what is the policy price?
(A.4) [worth 2 points] If you sell this policy at the price in (A.3) and next year’s yield is 478, what are the per acre profits of this policy?
(A.5) [worth 2 points] If you sell this policy at the price in (A.3) and next year’s yield is 325, what are the per acre profits of this policy?
(A.6) [worth 2 points] If you sell this policy at the price in (A.3), what is the expected profits of the policy when the policy is sold? That is, if this policy were sold thousands of times, what would the average profit per acre be?
(B) VaR Without Histograms
Download data on the simulated profits / losses for a company at here.
(B.1) [worth 4 points] There are 100 total simulated profits / losses, representing the possible profits the firm may experience and the probability of each possibility. I want you to calculate the VaR for this firm using a 7% threshold without using a histogram. Do this by first sorting the data in Excel (look under Data top at top then the Sort command underneath). Sort the profits / losses from the smallest to the largest number. Then, find the specific loss at which 7% of the simulations are less than or equal to this loss and 93% are greater. Whatever that specific loss is, that is the VaR.
(B.2) [worth 2 points] Repeat (B.1), but now identify the VaR using a threshold of 12%.
