German buys a 2-year insurance. During the two years, he may die or surrender the policy. If he dies in the first two years, insurance company pays 2,000 at the end of the year. If he surrenders in the first year, the insurance company pays 200 at the end of the year. If he surrenders in the second year, the insurance company pays 300 at the end of the year.
The insurance company uses an interest rate, i = 0.05, to compute present value.
The probability that German will die in the first year is 0.02, and the probability that he will surrender in the first year is 0.08. If he survives one year, the probability that he will die in the second year is 0.03, and the probability that he will surrender in the second year is 0.06.
Use the following four uniform random numbers on [0, 1) to simulate the company’s payment to German:
0.16 0.96 0.68 0.82
Determine the average simulated present value of the company’s payment to German.
Ok I understand how to do the problem, but how am I supposed to know which order to set up my cumulative probabilities in? They are in one order in the intro paragraph, a different order when they give the probabilities, and then in a different order from both of those in the solution (survival, surrender 1st year, surrender 2nd year, die 1st year, die 2nd year). I know in other simulation problems if they don't specify you are just supposed to use them in the order they are given, is there some sort of rule for this type of problem so I know what order to build my cumulative prob's in?
The insurance company uses an interest rate, i = 0.05, to compute present value.
The probability that German will die in the first year is 0.02, and the probability that he will surrender in the first year is 0.08. If he survives one year, the probability that he will die in the second year is 0.03, and the probability that he will surrender in the second year is 0.06.
Use the following four uniform random numbers on [0, 1) to simulate the company’s payment to German:
0.16 0.96 0.68 0.82
Determine the average simulated present value of the company’s payment to German.
Ok I understand how to do the problem, but how am I supposed to know which order to set up my cumulative probabilities in? They are in one order in the intro paragraph, a different order when they give the probabilities, and then in a different order from both of those in the solution (survival, surrender 1st year, surrender 2nd year, die 1st year, die 2nd year). I know in other simulation problems if they don't specify you are just supposed to use them in the order they are given, is there some sort of rule for this type of problem so I know what order to build my cumulative prob's in?
Adapt Simulation Question
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