An Option-Based Pricing Model of Private Mortgage Insurance

Abstract

This study uses option-pricing techniques to determine the impact of changes in the mortgage contract or in the economic environment on mortgage insurance values. We found that actual variations in insurance prices for changes in the loan-to-value ratio are substantially less than those called for in theory. This article demonstrates that option-based pricing models can play a useful role in providing firms with estimated insurance prices that reflect the economic environment and the terms of the mortgage contract.