Pricing Reinsurance Contracts on FDIC Losses

Dilip B. Madan and Haluk Ünal

Financial Markets, Institutions & Instruments, 2008, vol. 17, issue 3, 225-247

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.

Date: 2008
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https://doi.org/10.1111/j.1468-0416.2008.00140.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:finmar:v:17:y:2008:i:3:p:225-247

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