Valuation of double trigger catastrophe options with counterparty risk
Sheng-Yung Yang (),
Yu-Hong Liu and
Alan T. Wang
The North American Journal of Economics and Finance, 2013, vol. 25, issue C, 226-242
This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.
Keywords: Catastrophe; Stochastic interest rate; Counterparty risk; Compound Poisson (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:25:y:2013:i:c:p:226-242
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