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 repair yourself. If the house suffers $45,000 in damage, you pay $25,000 and the insurance company pays the remaining $20,000)
1) Graph the positions of the unhedged home, the home insurance and the hedged home position on the profit and loss diagram. In the diagram, specify the relevant values on the diagram. 2) To which trader type the insurance company belong? Explain your answer.
a. Call buyer
b. Call seller
c. Put buyer
d. Put seller