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Valuing Risk Management Tools as Complex Derivatives: An Application to Revenue Insurance

Directory : Faculty : Intellectual Contributions

Intellectual Contribution by Alan Jung

Contribution Title

Valuing Risk Management Tools as Complex Derivatives: An Application to Revenue Insurance

Publication

Journal of Risk

Co-author

C. Ramezani

Year

2001

Description

Revenue insurance schemes provide protection against declines in production, prices, or both. Their indemnity payment structure resembles options with complex contingencies -- exotic options. Crop Revenue Coverage (CRC) is a privately sold, but government subsidized, insurance product that protects farmers against adverse movements in prices and yield. We show that CRC's indemnity payments involve the exchange of a known quantity of European Collar Options for a random quantity of similar options: an Asian option with stochastic strike price. We use Monte Carlo Simulation to value this exchange of options. Our results provide a new framework for measuring mispricing in this important insurance market.

Complete Citation

Valuing Risk Management Tools as Complex Derivatives: An Application to Revenue Insurance, co-authored with C. Ramezani. Journal of Financial Engineering, March 1999, Vol. 8, No. 1.

Website

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