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Pricing Reinsurance Contracts on FDIC Losses
Author(s) -
Madan Dilip B.,
Ünal Haluk
Publication year - 2008
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/j.1468-0416.2008.00140.x
Subject(s) - reinsurance , weibull distribution , actuarial science , index (typography) , yield (engineering) , call option , econometrics , economics , financial economics , computer science , statistics , mathematics , materials science , world wide web , metallurgy
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.