Pricing Reinsurance Contracts on FDIC Losses

23 Pages Posted: 18 Jul 2008

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland

Haluk Ünal

affiliation not provided to SSRN

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.

Suggested Citation

Madan, Dilip B. and Ünal, Haluk, Pricing Reinsurance Contracts on FDIC Losses. Financial Markets, Institutions & Instruments, Vol. 17, Issue 3, pp. 225-247, August 2008, Available at SSRN: https://ssrn.com/abstract=1162414 or http://dx.doi.org/10.1111/j.1468-0416.2008.00140.x

Dilip B. Madan (Contact Author)

University of Maryland

Haluk Ünal

affiliation not provided to SSRN

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