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Chapter 3 - A. Insurance. Insurance. Insurance is a contract that covers losses in value of the underlying. Example: Home insurance or car insurance. If you have insured your car, and if your car decreases in value due to a car accident, you will get paid. No, loss in value no payment.

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Chapter 3 a

Chapter 3- A

Insurance


Insurance
Insurance

  • Insurance is a contract that covers losses in value of the underlying.

    • Example: Home insurance or car insurance. If you have insured your car, and if your car decreases in value due to a car accident, you will get paid. No, loss in value no payment.

    • That looks like a long put option!

Dr. Cevat Ertuna


Exercise car insurance
Exercise: Car Insurance

Your car is worth NDT 395 000

Incase of accident insurance company assess the loss in value and pays you that minus the deductible.

Deductible is NTD 10 000 and insurance will cost you NTD 13 000.

The Payoff of this contract is as follows:

Dr. C. Ertuna


Exercise insurance payoff
Exercise: Insurance Payoff

Dr. C. Ertuna


Exercise insurance payoff1
Exercise: Insurance Payoff

Dr. C. Ertuna


Insurance payoff
Insurance Payoff

  • Insurance payoff is like a long put option payoff.

  • Strike price is like Maximum payment minus deductible

  • Insurance companies are like writer of the put.

    INSURANCE = Long PUT + UNDERLYING

Dr. Cevat Ertuna


Options insurance
Options & Insurance

  • If we have options WITH the underlying asset then they serve as insurance.

  • If we have options WITHOUT the underlying asset then they are risky investment.

Dr. C. Ertuna


Options insurance1
Options & Insurance

  • Long Put is insurance for the asset we own.

  • Long Call is insurance for asset we plan to own.

Dr. C. Ertuna


Generalized summary
Generalized Summary

Dr. C. Ertuna


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