Bell, Peter (2011): Use of put options as insurance.
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An 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.
|Item Type:||MPRA Paper|
|Original Title:||Use of put options as insurance|
|Keywords:||Insurance, put option, binomial model, risk averse, risk neutral|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C60 - General
|Depositing User:||Peter N Bell|
|Date Deposited:||24. Apr 2011 13:03|
|Last Modified:||15. Feb 2013 21:19|
R. Rees and A. Wambach, The Microeconomics of Insurance, Foundations and Trends in Microeconomics, vol 4, no 1–2, pp 1–163, 2008