Pandemic options

Juan Peng, Jinhong Wang and Jinqiang Yang

Applied Economics, 2022, vol. 54, issue 55, 6437-6444

Abstract: We develop a pricing model for pandemic European call and put options, in which the underlying variable is the infected population. Interestingly, the economic predictions of the pandemic options are essentially different from the common stock option. For example, the value of pandemic call option is concave in the underlying variable and decreasing in the volatility. In addition, the maturity has ambiguous impact on the valuation of pandemic call option. We show that the basic reproduction number, the unique characteristics of pandemic, has a significant effect on the valuation of each options.

Date: 2022
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DOI: 10.1080/00036846.2022.2066061

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