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Fort Collins, CO | I believe the RMA still uses a (poorly) adjusted and weighted average of December implied volatility over the last five days of February.
If they are still doing it this way, it's not the way I would do it (that is if my intent was to fairly price and manage the risk I was taking and not to create a larger-than-stated "shadow" subsidy):
https://legacy.rma.usda.gov/pubs/2015/volatilitymethodology.pdf
I will tell you that the current average at-the-money volatility we are using to determine the sensitivity of the embedded options in crop insurance is currently about 27.33%. Assuming they're still doing things the same way, and Dec21 at-the-money implied vol remains constant from now until the end of Feb, the RMA will use about 20.91%.
I remember talking to a room of crop insurance agents a few years back and telling them what a generally good deal I thought crop insurance was. They liked hearing that. They didn't like it when I told them that it was in large part because they didn't know how to price it properly.
In the interest of full disclosure, I am not now, nor have I ever been, a licensed insurance agent of any kind. So please, don't take this as advice, there are many other factors that go into whether or not crop insurance is a good deal. | |
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