# 6.9.Kreps

 Kreps 2 financial strategies to develop risk load Swap Risk-Free Investment for Risky InvestmentPurchase Put Options Kreps 2 constraints when determining risk load Safety Constraint: funds available at year end are at least equal to the specified loss safety level (IRR ≥ rf)Investment Variance Constraint: variance of reins + inv strategy should be no more volatile than a direct investment in risky assets Kreps Reins + inv compared to equity investment Writing reinsurance can never really result in dist of capital that are really the same as investment dist because investment returns are strictly limited to having worst-case returns of -100% Kreps Swap Strategy (1 + IRR)A = (1 + rf)(P + A) - LR = (y - rf)/(1 + rf) * ASafety Constraint A = (s - μL) / (1 + y)s = eμ+ N-1(pct)σσ = √ln(1 + CV²)μ = ln(mean) - σ²/2Variance Constraint A = σL/σy Kreps Put Option Strategy F = (P + A) / (1 + r)R = A[(1 + r)(1 + y) - (1 + i)/(1 + i)] + μL[(1 + r)/(1 + i) - 1/(1 + rf)]Safety Constraint A = 1 / (1 + y) * [(1 + i)/(1 + rf) * s - μL]Variance ConstraintA = [b + √(b² + ac)] / aa = σy²(1 + i)² - σi²(1 + y)²b = μL(1 + y)σi²c = μL²σi² + σL²(1 + i)² AuthorExam9 ID68738 Card Set6.9.Kreps DescriptionKreps Updated2011-02-24T21:27:45Z Show Answers