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.)

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.
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.

jeff jeffy answered 2 years ago

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