• How to value insurance premium

    Chapter 4 - Cotton trading - Guaranteed minimum price contracts 


    Take the example of car insurance. Three factors need to be taken into account.

    • The value of the car (cotton) – if the car is old and inexpensive, and the value is low, then this will be reflected in the cost of insurance. If the car is a new and expensive car, and the value is high, then this will result in a slightly higher insurance premium.
    • The length of time over which the insurance is to run. To insure a car for 3 months will of course cost less than to insure a car for a full year.
    • Volatility. In other words, the number of accidents the owner has had in the past. If the owner has been involved in no accidents, then the insurance premium will be lower than for a driver who has been involved in multiple accidents. Needless to say, these accidents may not have been the owner’s fault! It is exactly the same for the cotton market. If the market has seen strong movements in the last few months, then a higher insurance premium will be needed than if the market has not moved. After all, the market has become a more dangerous place.
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    Cotton Exporter's Guide

    Brochure - African cotton promotion
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