PRICING THE REVENUE INSURANCE OF SUGAR APPLE AND BANANA IN TAIWAN: AN ACTUARIAL APPROACH

Abstract

This paper uses Fratini’s (2017) actuarial approach and the traditional risk neutral approach to price the revenue insurance under the framework of Black Scholes put option pricing. Then, we extend the pricing to include a coverage limit. Further, we also decompose the revenue into price and yield and develop another pricing formula using the price and yield information. The risk neutral approach assumes that the underlying revenue is tradable while the actuarial approach assumes the revenue risk is diversifiable. We compute the premiums of the revenue insurance of sugar apple and banana in Taiwan. The results show that the premiums of the actuarial approach are generally lower than the risk neutral approach. Because revenue is often non-tradable, thus, if the individual revenue risk can be fully diversified, then the actuarial approach should be suggested for premiums calculation.

Keywords

• actuarial approach
• black scholes model
• option pricing
• put options
• revenue insurance