Center for Risk Management Research

How risky and expensive it would be to insure a long-term individual Social Security account invested in stocks against the risk that the portfolio’s value would collapse? This paper uses a particular metric to evaluate this risk and cost. This metric is a long-term put option written on such a portfolio. The answer is that for reasonable parameters the Black-Scholes price of such a put option is surprisingly low: just 2-4% of original investment.