Pricing of “Insurance + Futures” Mode Price Insurance: A Case Study of Corn

Abstract

Abstract:

"Insurance + futures" mode is a major tool for the transformation and upgrading of agricultural insurance, which is of great significance for the supply-side structural reform of agriculture in China. Therefore, this paper studies the core problem of "insurance + futures" mode-price insurance pricing. Firstly, we investigate the option-based price insurance in Eurasian, America, American-Asian, Butterfly and Barrier, which is popular among farmers. Based on the characteristics of agricultural futures and the pilot experience of "insurance + futures" mode in China, we analyses the design principles, pricing ideas and applicability of price insurance, and enriches the pricing theory and product spectrum of "insurance + futures" mode in China. Secondly, the agricultural futures price is fitted by means of stochastic equation with seasonal and mean reversion characteristics (SMRS). Based on this, six OTC replication forward-starting futures options price insurance pricing models of the corresponding "insurance + futures" mode are constructed. The steps of calculating fitting parameters by maximum likelihood method and pricing unit premium by dual variable Monte Carlo method are clarified, which effectively solves the disadvantage of price fitting of agricultural futures and insurance pricing methods combining inadequacy. Finally, a case study on the corn price insurance of "insurance + futures" mode is carried out. Six insurance unit premiums of "insurance + futures" model are calculated, and the differences of unit premiums under different target prices and volatility are compared. The results show that the Eurasian option insurance and American Asian option insurance, whose target price is close to the futures price when the insurance contract is signed and pricing volatility is conservative, are more cost-effective and suitable for farmers.

Key words: “insurance + futures&rdquo, mode, price insurance, pricing, OTC replication forward-starting futures options, corn

Yu Fangping, Liu Yu, Wang Yugang, Yin Hang. Pricing of “Insurance + Futures” Mode Price Insurance: A Case Study of Corn[J]. , 2020, 32(4): 35-47.

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