An Asian Option Approach to the Valuation of Insurance Futures Contracts

WFIC Paper 94-03

Posted: 22 Aug 1998

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Abstract

The insurance futures contracts introduced in December 1992 by the Chicago Board of Trade offer insurers an alternative to reinsurance as a hedging device for underwriting risk. These instruments have the usual features of liquidity, anonymity and low transactions costs that characterize futures contracts. This paper addresses the issue of pricing insurance futures contracts in an arbitrage-free framework as the expectation under the risk-neutral probability measure of the terminal cash flow provided, for instance, by a long position in a futures contract. Since by definition of the contract the terminal cash flow is related to the aggregate claims incurred during a calendar quarter, the valuation problem is of the same type as the one that arises in the pricing of zero-exercise price Asian options. We propose a solution to this problem using the exact approach developed by Geman and Yor (1992, 1993).

JEL Classification: G13

Suggested Citation

Cummins, J. David and Geman, Helyette, An Asian Option Approach to the Valuation of Insurance Futures Contracts. WFIC Paper 94-03, Available at SSRN: https://ssrn.com/abstract=6883

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Helyette Geman

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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