Pricing Reinsurance Contracts on FDIC Losses |
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| Authors: | Dilip B Madan Haluk Ünal |
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| Institution: | 1. Professor of Finance at the Robert H. Smith School of Business specializing in Mathematical Finance;2. Professor of Finance at the Robert H. Smith School of Business of the University of Maryland |
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| Abstract: | This paper proposes a pricing model for the FDIC's reinsurance risk. We derive a closed‐form Weibull call option pricing model to price a call‐spread a reinsurer might sell to the FDIC. To obtain the risk‐neutral loss‐density necessary to price this call spread we risk‐neutralize a Weibull distributed FDIC annual losses by a tilting coefficient estimated from the traded call options on the BKX index. An application of the proposed approach yield reasonable reinsurance prices. |
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