Question

This problem is from 2008.

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

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

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

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

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

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

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

Write out all possible rain/dry possibilities for the 13th and 14th days, with their associated probabilities.

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

Without insurance, what are the expected profits?

With insurance, what are profits if there are rain postponements?

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 the policy?

Over a ten year period, assuming baseline revenue and costs are approximately the same amounts as today, what would the US Open expect 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 derivative contracts, 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 US Open regardless of whether play is suspended or not. It pays based on measured rainfall within 24 hour period exceeding ¼ of an inch.

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

Explain.

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

Without insurance, what are Expected profits?

With insurance, what are profits if there are rain postponements?

With insurance what are profits if there is no rain?

Should the US Open explore including additional days into the policy?

Over a ten year period, assuming baseline revenue and costs are approximately the same amounts as today, what would the US Open expect 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 exposure to rain?

This problem is from 2008.

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

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

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

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

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

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

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

1. Write out all possible rain/dry possibilities for the 13^th and 14^th days, with their associated probabilities.
2. Without insurance, what are the profits if there are rain postponements to either or both finals?
3. Without insurance, what are the expected profits?
4. With insurance, what are profits if there are rain postponements?
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 the policy?
8. Over a ten year period, assuming baseline revenue and costs are approximately the same amounts as today, what would the US Open expect 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 derivative contracts, 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 US Open regardless of whether play is suspended or not. It pays based on measured rainfall within 24 hour period exceeding ¼ of an inch.

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

Explain.

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

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

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

6. Over a ten year period, assuming baseline revenue and costs are approximately the same amounts as today, what would the US Open expect 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 its exposure to rain?

please make sure the second part is answer.  

Answer 1