Measuring Price Risk in Rating Revenue Coverage: BS or No BS?

摘要: The Black-Scholes (BS) option pricing model has been a cornerstone of modern financial theories since its introduction by Black and Scholes (1973) subsequent refinement Merton (1973). realized widespread adoption for number purposes. Inherent in the are assumptions. An important potentially restrictive assumption is that underlying asset price log–normally distributed. Among many diverse uses BS model, theory used to derive measurements variance expected (harvest-time) prices use rating revenue coverage federal crop insurance program. Revenue currently accounts about 80% total liability insured This frequently exceeds $100 billion thus accuracy premium rates vital importance. Risk Management Agency (RMA) USDA focus recent criticisms Critics have argued favor retrospective measures variability based on historical movements or recommended other approaches measuring risk. article reports contracted review methodology commissioned RMA. We evaluate alternative variability, including several critics Our results suggest preferred alternatives basis numerous criteria.