Post by Sapphire Capital on Aug 20, 2008 2:33:47 GMT 4
Pricing Reinsurance Contracts on FDIC Losses
Dilip B. Madan
Haluk Ünal
Financial Markets, Institutions & Instruments, Vol. 17, Issue 3, pp. 225-247, August 2008
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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1162414
Dilip B. Madan
Haluk Ünal
Financial Markets, Institutions & Instruments, Vol. 17, Issue 3, pp. 225-247, August 2008
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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1162414