Insuring against the shortfall risk associated with real options

We would like to insure against the risk that a geometric Brownian motion, correlated with the price process of a certain traded asset, is in a set E at time T. In this paper it is shown that the best action one can take to insure against this risk is to buy a binary option on the traded asset. We give explicit formulas in the case that E is an infinite interval. The setting of all our investigations is the Black-Scholes model. Mathematics Subject Classification (2000): 91B28, 60J65, 62P05, 91B30, 62F03 Journal of Economic Literature Classification: G31