In: Finance
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.)
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.