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Suppose an insurance company will need to payout $400 in 30 years (with certainty), It has collected $80 in premiums today and equity is $20,
Suppose an insurance company will need to payout $400 in 30 years (with certainty),
It has collected $80 in premiums today and equity is $20,
It can invest assets in either,(1) a 30-year bond that has 300% return in 30 years, or, (2)a 15-year bond that has 100% return, and then reinvest in another 15-year bond that has a random return. Suppose the second half random return will be either 200% or 0%, each with probability 0:5.
Calculate the expected equity value and the expected failure probability of the two options.
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