The concept of insurance is essentially a hedge against certain kinds of risk. When you buy car insurance, you’re basically buying the ability to sell your car for a certain price to the insurance company, a price most of the time, you wouldn’t be willing to accept.
The big issues are adverse selection and failing to institute binding norms. If I sell a product I refuse to deliver, the concept breaks down.
These same issues arise in options markets. Given this theoretical framework, it’s possible to reverse engineer costs based on a similar approach or similar inputs.
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