Question

In: Finance

You own a house that cost $200000 to build. You buy a $15000 insurance policy to...

You own a house that cost $200000 to build. You buy a $15000 insurance policy to compensate you for damage to the house. The deductible $25000.(If your house suffers $4000 damage from a storm, you pay for all repairs yourself. If the house suffers $45000, in damage, you pay$25000 and the insurance company pays the remaining $20000.)

  1. Graph the positions of the unhedged home, the home insurance and the hedged home position on the profit and loss diagram. In the diagram, specify the relevant values on the diagram.
  2. To which trader type the insurance company belong? Explain your answer. a. Call buyer b. Call seller c. Put buyer d. Put seller

Solutions

Expert Solution

The insurance company belongs to put option buyer.

The $ 15,000 insurance premium is like the premium of a put, and the $ 175,000 level at which insurance begins to make payments is like the strike price on a put.


Related Solutions

You own a house that costs $1 million. You buy a $20,000 insurance policy to compensate...
You own a house that costs $1 million. You buy a $20,000 insurance policy to compensate you for damage to the house. The dectible is $40,000. How much is the maximum that the insurance company may pay for the damage on your house.    less than 500,000     higher thatn 500,000 but less than 700,000.     higher thatn 700,000 but less than 900,000.     higher thatn 900,000 but less than 1,1000,000.     Higher than 1,100,000.
A couple has decided to purchase a $200000 house using a down payment of $15000. They...
A couple has decided to purchase a $200000 house using a down payment of $15000. They can amortize the balanxe at 10% over 25 years. What is their monthly payment? What is the total interest paid? What is the equity after 5 years? What is the equity after 20 years?
You found your dream house. It will cost you $200000 and you will put down $35000...
You found your dream house. It will cost you $200000 and you will put down $35000 as a down payment. For the rest you get a 30-year 5.5% mortgage. What will be your monthly mortgage payment in $ (assume no early repayment)? Your Answer: Question 11 options: Answer Hide hint for Question 11 Mortgage monthly payment N=30 years*12 month each year=360 I/Y=monthly interest rate= annual interest rate/12 PV= house price- down payment (money you will need to borrow from the...
You found your dream house. It will cost you $200000 and you will put down $40000...
You found your dream house. It will cost you $200000 and you will put down $40000 as a down payment. For the rest you get a 30-year 5.5% mortgage. What will be your monthly mortgage payment in $ (assume no early repayment)?
if you decide to buy a Ferrari it will cost $200000 after 4years you could sell...
if you decide to buy a Ferrari it will cost $200000 after 4years you could sell it for $60000. You would have to do a major service after 2 years costing $8000 and a minor service after 1st and 3rd year for $4000. if you decide to lease the Ferrari you would pay $30000 per year. You dont need to pay for services since the leasing company will take care of it. Assuming MARR of 10% perform an evaluation if...
You plan to buy a house in 24 months. The cost of the house at that...
You plan to buy a house in 24 months. The cost of the house at that time will be $300,000 . How much do you have to invest each month, starting next month, for 12 months to exactly pay for the house if you r investments earn 4.50% APR (compounded monthly)?
You are looking to buy your first house. The cost of the house is $325,000. The...
You are looking to buy your first house. The cost of the house is $325,000. The bank has agreed to make a loan to you for 30 years at 3.15% if you can make a down payment of 7.00%, and the loan payments do not exceed 36% of your gross monthly income. Based upon this information: What is the amount of the mortgage loan that the bank will lend to you? What will be the amount of your monthly payments?...
Explain why hedging is like buying an insurance policy. To buy an insurance policy, you need...
Explain why hedging is like buying an insurance policy. To buy an insurance policy, you need to pay a premium; what is the corresponding premium in hedging? Give an example to clarify your answer.
You looking to buy your first house. The cost of the house is $350,000. The bank...
You looking to buy your first house. The cost of the house is $350,000. The bank has agreed to make a loan to you for 30 years at 3.25% if you can make a down payment of 10%, and the loan payments equal 40% of your gross monthly income. Based upon this information: A. What will be the amount of your monthly payments? B. How much is your gross monthly income? C. What must your annual salary be in order...
you are planning to build a house at a cost of SR950, 000 one year from...
you are planning to build a house at a cost of SR950, 000 one year from now; however, a contractor who needs work has offered to build your house for SR 740,000 if he will do the building now instead of one year from now. If the interest rate is 14% per year. A discount you getting is closest to:
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT