Are generalized call-spreads efficient? |
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Authors: | G Carlier R-A Dana |
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Institution: | Université Paris Dauphine, CEREMADE, UMR 7534, Place de Lattre de Tassigny, 75 775 Paris, Cedex 16, France |
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Abstract: | In order to explain coexistence of a deductible for low values of the loss and an upper limit for high values of the loss in insurance contracts, we consider the exchange of risk between two rank dependent expected utility maximizers. It is shown that if the insurer (insured) takes more into account the lowest outcomes – hence maximal losses – than the insured (insurer), then the optimal contract has an upper limit (includes a deductible for high values of the loss). If furthermore, the insured (insurer) neglects the highest outcomes while the insurer (insured) does not, the optimal contract includes a deductible (full insurance) for low values of the loss. |
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Keywords: | Contract Deductible Upper-limit Call-spread efficiency |
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