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Pricing Reinsurance Contracts on FDIC Losses

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  • Dilip B. Madan
  • Haluk Ünal

Abstract

This paper proposes a pricing model for the FDIC's reinsurance risk. We derive a closed‐form Weibull call option pricing model to price a call‐spread a reinsurer might sell to the FDIC. To obtain the risk‐neutral loss‐density necessary to price this call spread we risk‐neutralize a Weibull distributed FDIC annual losses by a tilting coefficient estimated from the traded call options on the BKX index. An application of the proposed approach yield reasonable reinsurance prices.

Suggested Citation

  • Dilip B. Madan & Haluk Ünal, 2008. "Pricing Reinsurance Contracts on FDIC Losses," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 17(3), pages 225-247, August.
    • Handle: RePEc:wly:finmar:v:17:y:2008:i:3:p:225-247
    DOI: 10.1111/j.1468-0416.2008.00140.x
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    References listed on IDEAS

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