Use of put options as insurance
AbstractAn important question in insurance is the amount of coverage to purchase. A standard microeconomic model for insurance shows that full insurance is optimal. I present a different model where the decision variable is the number of put options and show that full insurance is still optimal, but the number of put options required to achieve this is larger than the endowment of risky assets. The model I present is based on a binomial model for a financial market, where the put option represents insurance.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 30469.
Date of creation: 23 Apr 2011
Date of revision:
Insurance; put option; binomial model; risk averse; risk neutral;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-IAS-2011-04-30 (Insurance Economics)
- NEP-RMG-2011-04-30 (Risk Management)
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