Gar Lipow: > Don't they become "call" liabilities of the the condition they are guarding > against happens.
Actually, it is the other way around. If you are the protection buyer, you are holding a put option: you sell the debt to the protection seller at the "face" value, if you can exercise the option. In other words, the seller of protection is selling a put option. The most the protection seller can lose is the notional principal, if there is no recovery. Of course, if the protection seller does not have that amount, then he or she gets screwed. Indeed, many insurance policies are put options of sorts sold by the insurer, not call options, although some are call options. Think about home insurance: if your home burns down, you give nothing to get some money adjusted for the deductible (the strike), which is not always known with certainty, in return for the insurance fees you paid. Theft insurance is similar: what do you give if your camera is stolen to get some money adjusted for the deductible (the strike) back? Life insurance, health insurance and the like are sorts of call options at the zero strike, as we hope, which is always known with certainty, though. When I go and see my doctor, all I pay is the co-pay, so I am calling the doctor's fee less the co-pay at zero strike in return for the insurance premiums I pay. In either case, the premiums I will pay to exercise the option are not known with certainty ahead of time, though. Wonders of option pricing, right? Go and price such things, if you can! Best, Sabri . _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
