Livestock Revenue Insurance

This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option, an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Because of the complexity of pricing Asian...

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Bibliographic Details
Published in:The journal of futures markets 2001-06, Vol.21 (6), p.553-580
Main Authors: Hart, Chad E., Babcock, Bruce A., Hayes, Dermot J.
Format: Article
Language:English
Subjects:
Agricultural income
Agriculture
Animals
Cattle
Costs
Crop insurance
Efficiency
Feeds
Financial services
Futures
Insurance
Insurance coverage
Insurance policies
Insurance premiums
Livestock
Market prices
Marketing
Moral hazard
Option pricing
Options markets
Options trading
Revenue
Risk
Soybeans
Studies
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Summary:This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option, an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Because of the complexity of pricing Asian basket options, we combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the insurance policies to strategies involving existing futures and options. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:553–580, 2001
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.1603