A DERIVATIVE SECURITY APPROACH TO SETTING CROP REVENUE COVERAGE INSURANCE PREMIUMS
By: Stokes, Jeffrey R.
Stokes, Jeffrey R., A DERIVATIVE SECURITY APPROACH TO SETTING CROP REVENUE COVERAGE INSURANCE PREMIUMS, Journal of Agricultural and Resource Economics, Volume 25, Issue 1, July 2000, Pages 159-176
The nature of indemnities and reliance on futures price averaging during two distinct time intervals throughout the production year imply Crop Revenue Coverage (CRC) insurance behaves like an exotic put option. Treating this type of insurance as a derivative security, an analytical model is developed and an algorithm for solving the model to place a lower bound on insurance premiums is presented. Monte Carlo simulation, taking into account the path-dependent nature of an Asian-type option, is then used to determine lower-bound estimates for insurance premiums on corn gross revenue under specified price and yield distributions.