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An Asteroid Strike Swap?
Something a little less ordinary for the finance geeks:
I was sitting in a talk about detection and prevention of asteroid strikes this morning when the speaker mentioned that it would cost around 300 million Dollars to launch a kinetic energy deflection mission (basically the spacecraft or something carried by it smashes into the asteroid at a high velocity in order to change its trajectory). They seemed to think 300 million wasn't much, but it got me to wondering about financing such a mussion. Obviously in any single year, the odds on the Earth being hit by an asteroid big enough to cause great damage are very small. I started thinking about credit default swaps where the holder of the swap is paid an annual income and contracts to pay out a certain sum if a named company goes bust, with the company usually having a small probability of actually going bust. What I was thinking is would it be possible to set up what was functionally an asteroid strike swap? For example a contract which would pay out half a billion Dollars when such and such a committee stated that the probability of a particular asteroid greater than a certain size hitting the Earth had reached 1 in 10 (the trigger point for sending a deflection mission would most likely be less than certainty). Is there a formula for pricing such contracts (I.E compute a ballpark annual premium)? Say the probability of this being triggered in any one year were 1 in a million, how would a rough price be worked out? FoFP |
#2
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An Asteroid Strike Swap?
In article ,
M Holmes wrote: Is there a formula for pricing such contracts (I.E compute a ballpark annual premium)? Say the probability of this being triggered in any one year were 1 in a million, how would a rough price be worked out? I don't think it makes any sense to do such things for such low probabilities. Insurance companies work because the actual cost is close to the expected cost over a reasonable timescale (a year say). To make a single one-in-a-million chance work like that, the timescale would be millions of years. To put it another way: from the point of view of any person's lifetime, the probability is zero. They can take the premium and not worry about ever having to pay. It would only work on a galactic scale, where millions of worlds would be paying you premiums and you'd be paying out on a few asteroids a year. From a mathematical point of view, the relevant theorems are the (strong and weak) laws of large numbers: these effectively say that over a sufficiently long period the law of averages applies. But the "sufficiently long period" here exceeds the lifetime of people or companies. -- Richard -- "Consideration shall be given to the need for as many as 32 characters in some alphabets" - X3.4, 1963. |
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