This problem is from 2008.

The US Open is an annual two week tennis event in Flushing NY inlate August, early September.

In a year with no significant rain interruption, the US Openmakes approximately $275 million in revenue and incurs expenses ofapproximately $225 million, for a profit of $50 million. Of the$275 million in revenue approximately $100 million is from ticketsales. As a non-profit organization, it incurs no tax.

The US Open can work around rain delays but if all play issuspended in either the afternoon or evening sessions, tickets aregood for the same session in the following year, in which case theUSTA foregoes revenue. The largest ticket prices are for thewomen’s and men’s finals so a rain-out on either of these daysforgoes the most revenue.

The Open is interested in buying a contract to protect itselffrom foregone revenues from rain interruptions during the finals.Working with its insurance broker, it approaches the insurancemarket to see if it can buy a weather derivative or insurancepolicy.

The US Open estimates that between foregone ticket sales andlost margin on concessions and broadcasting rights, a rain out oneither the men’s or women’s finals will mean $30 mil in lostprofits.

The insurance broker is able to secure an insurance policy thatwill indemnify the US Open if rainfall occurs during the men’s orwomen’s finals. The policy treats each event separately, meaningthere is coverage and a corresponding premium charged forpostponement of either final. The insurer is willing to provide apolicy covering each separate event that will indemnify the US Openwith a limit of $30 million and a policy premium of $10 million foreach. As with all insurance policies, the US Open can collect theinsurance payments only once it demonstrates the losses.

The weather desks at three major reinsurance holding companieswith broker/dealers supply the probabilities associated withsignificant rainfall (> ¼ inch) on days 13 and 14 of thiscalendar year, which is 20% for either day, and conditional on rainon the 13th day, the chance of rain on the 14th day is 30%.

Write out all possible rain/dry possibilities for the 13th and14th days, with their associated probabilities.

Without insurance, what are the profits if there are rainpostponements to either or both finals?

Without insurance, what are the expected profits?

With insurance, what are profits if there are rainpostponements?

With insurance what are profits if there is no rain?

What are the expected profits if insurance is purchased?

Should the US Open explore including additional days into thepolicy?

Over a ten year period, assuming baseline revenue and costs areapproximately the same amounts as today, what would the US Openexpect to earn (i) in the absence of an insurance policy and (ii)with the insurance policy?

The weather desk is also willing to write two weather derivativecontracts, one for day 13 and one for day 14, each with a payout of$30 million and a cost of $12 million. The derivative pays the USOpen regardless of whether play is suspended or not. It pays basedon measured rainfall within 24 hour period exceeding ¼ of aninch.

What is the best strategy for the US Open to manage its exposureto rain?

Explain.

Without insurance, what are the profits if there are rainpostponements to either or both finals?

Without insurance, what are Expected profits?

With insurance, what are profits if there are rainpostponements?

With insurance what are profits if there is no rain?

Should the US Open explore including additional days into thepolicy?

Over a ten year period, assuming baseline revenue and costs areapproximately the same amounts as today, what would the US Openexpect to earn (i) in the absence of an insurance policy and (ii)with the insurance policy?

What is the best strategy for the US Open to manage its exposureto rain?

This problem is from 2008.

The US Open is an annual two week tennis event in Flushing NY inlate August, early September.

In a year with no significant rain interruption, the US Openmakes approximately $275 million in revenue and incurs expenses ofapproximately $225 million, for a profit of $50 million. Of the$275 million in revenue approximately $100 million is from ticketsales. As a non-profit organization, it incurs no tax.

The US Open can work around rain delays but if all play issuspended in either the afternoon or evening sessions, tickets aregood for the same session in the following year, in which case theUSTA foregoes revenue. The largest ticket prices are for thewomen’s and men’s finals so a rain-out on either of these daysforgoes the most revenue.

The Open is interested in buying a contract to protect itselffrom foregone revenues from rain interruptions during the finals.Working with its insurance broker, it approaches the insurancemarket to see if it can buy a weather derivative or insurancepolicy.

The US Open estimates that between foregone ticket sales andlost margin on concessions and broadcasting rights, a rain out oneither the men’s or women’s finals will mean $30 mil in lostprofits.

The insurance broker is able to secure an insurance policy thatwill indemnify the US Open if rainfall occurs during the men’s orwomen’s finals. The policy treats each event separately, meaningthere is coverage and a corresponding premium charged forpostponement of either final. The insurer is willing to provide apolicy covering each separate event that will indemnify the US Openwith a limit of $30 million and a policy premium of $10 million foreach. As with all insurance policies, the US Open can collect theinsurance payments only once it demonstrates the losses.

The weather desks at three major reinsurance holding companieswith broker/dealers supply the probabilities associated withsignificant rainfall (> ¼ inch) on days 13 and 14 of thiscalendar year, which is 20% for either day, and conditional on rainon the 13^th day, the chance of rain on the14^th day is 30%.

1. Write out all possible rain/dry possibilities for the13^th and 14^th days, with their associatedprobabilities.
2. Without insurance, what are the profits if there are rainpostponements to either or both finals?
3. Without insurance, what are the expected profits?
4. With insurance, what are profits if there are rainpostponements?
5. With insurance what are profits if there is no rain?
6. What are the expected profits if insurance is purchased?
7. Should the US Open explore including additional days into thepolicy?
8. Over a ten year period, assuming baseline revenue and costs areapproximately the same amounts as today, what would the US Openexpect to earn (i) in the absence of an insurance policy and (ii)with the insurance policy?

The weather desk is also willing to write two weather derivativecontracts, one for day 13 and one for day 14, each with a payout of$30 million and a cost of $12 million. The derivative pays the USOpen regardless of whether play is suspended or not. It pays basedon measured rainfall within 24 hour period exceeding ¼ of aninch.

1. What is the best strategy for the US Open to manage itsexposure to rain?

Explain.

1. Without insurance, what are the profits if there are rainpostponements to either or both finals?
2. Without insurance, what are Expected profits?

3. With insurance, what are profits if there are rainpostponements?
4. With insurance what are profits if there is no rain?

5. Should the US Open explore including additional days into thepolicy?

6. Over a ten year period, assuming baseline revenue and costs areapproximately the same amounts as today, what would the US Openexpect to earn (i) in the absence of an insurance policy and (ii)with the insurance policy?
7. What is the best strategy for the US Open to manage itsexposure to rain?

please make sure the second part is answer.