Question

You own a house that costs $200,000 to build. You buy a $15,000 insurance policy to compensate you for damage to the house. The deductible is $25,000. (if your house suffers $4,000 damage from a storm, you pay for all the repairs yourself. if the house suffers $45,000, in damage, you pay $25,000 and the insurance company pays the remaining $20,000.)

to which trader type the insurance company belong? explain your answer.

a. call buyer

b. call seller

c. put buyer

d. put seller

Answer 1

The insurance company is acting as a put seller (Option d)

A put option is a contract in which the seller of the option agrees to buy the underlying at a predetermined price on a specific date if the underlying price falls below the strike price.

If the damage is more than 25,000 the insurance company pays the remaining amount. It is similar to the payoff of a put seller. Hence, the insurance company belongs to the put seller type trader.

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