Hurricane Bond Price Dependency on Underlying Hurricane Parameters

Chang Carolyn W. () and Feng Yalan ()
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Chang Carolyn W.: Department of Finance, California State University, Fullerton, USA
Feng Yalan: Department of Finance & Law, California State University, Los Angeles, USA

Asia-Pacific Journal of Risk and Insurance, 2021, vol. 15, issue 1, 1-21

Abstract: Hurricane bonds are parametric in nature as they have a dual-exercise structure: the first exercise is conditional on the hurricane’s physical landfall location and the second is conditional upon the embedded option ending in-the-money. We propose a coupled and physically-based hurricane bond pricing model via Monte Carlo simulation that resolves the dual exercise, which was not addressed in extant loss-based catastrophe bond pricing models. This coupled model is developed at the nexus of atmospheric science and finance by integrating hurricane risk modeling and option pricing. By applying this model to price a parametric hurricane bond, we demonstrate how a hurricane bond’s price is sensitive to its underlying hurricane’s physical parameters – genesis, heading, translation speed, velocity, and radius.

Keywords: hurricane bonds; hurricane risk management; parametric trigger; hurricane risk modeling; option pricing modeling (search for similar items in EconPapers)
JEL-codes: G13 G17 G22 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/apjri-2020-0017

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