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Finance: American Put Option

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Economics Questions

Question one:

The assumption of independence of risks matter in the example of insurance since in a world which contains individuals who are neutral when it comes to risk, the level of insurance demand is considered to be low especially in the cases of a hedge risk. The reason behind this is that investors are considered to be risk averse and every choice that they make is known to reflect the manner in which they avert the risks. If the probabilities of a house burning were positively correlated, the premiums required to make payments for the incurred losses may be adjusted with an aim of showing reflection of the special characteristics which are available in a policy. Results are however considered to be more predictable if a policy pool is larger (Anderson & Brown, ...

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