Sunday, August 26, 2007

Contingent liabilities and pricing tail

Tom Maguire at Just One Minute discusses a Michael Lewis article on pricing an option to cover the risk of an earthquake in both Japan and California. This is the kind of thing Warren Buffett and Ajit Jain have made so much money doing over the last decade or so. The discussion is a good example of the logic involved in estimating contingent probabilities.

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