Insurance Economics and Theory of Option Pricing: A Proposal

Abstract

Probability and maximum expected utility under risk aversion are corner stone of the contemporary insurance economics. Since economists use arbitrage assumption and riskless portfolio to construct the modern theory of option pricing, probability plays no role to determine option price under uncertainty. It is wrong that the contemporary insurance economics and the modern theory of option pricing are irrelevant and opposite because all prices of substitute products (e.g., portfolio insurance and option) should be explained by the same independent variables. Since option pricing is supposed to be similar to insurance pricing, the purpose of this paper is to propose a single price theory that explains both the premium of portfolio insurance and option price.