“Skewness and Stock Option Prices”, Hans Gerber and Bruno Landry,July 1997 |
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| Authors: | Kenneth O Kortanek Ph D V G Medvedev Ph D |
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| Institution: | 1. Department of Management Sciences , College of Business Administration and Program in Applied Mathematical and Computational Sciences, University of Iowa , Iowa City , Iowa. 52242;2. Department of Optimal Control Methods, Faculty of Applied Mathematics and Informatics , Belorussian State University , F Skorina pr 4 , Republic Belarus (until June 15, 1998) |
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| Abstract: | We determine the optimal amount of life insurance for a household of two wage earners. We consider the simple case of exponential utility, thereby removing wealth as a factor in buying life insurance, while retaining the relationship among life insurance, income, and the probability of dying and thus losing that income. For insurance purchased via a single premium or premium payable continuously, we explicitly determine the optimal death benefit. We show that if the premium is determined to target a specific probability of loss per policy, then the rates of consumption are identical under single premium or continuously payable premium. Thus, not only is equivalence of consumption achieved for the households under the two premium schemes, it is also obtained for the insurance company in the sense of equivalence of loss probabilities. |
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