Valuation of new-designed contracts for catastrophe risk management

Xingchun Wang ()

The North American Journal of Economics and Finance, 2019, vol. 50, issue C

Abstract: In this study, we design and price a new kind of catastrophe equity put options, whose payoff depends on the ratio of accumulated losses and the expected level over the life of the option. We adopt a compound Poisson process to describe accumulated catastrophe losses and assume catastrophe losses affect the prices of the underlying stock. In the proposed framework, we obtain an explicit pricing formula of the new kind of catastrophe equity put options. Finally, numerical results are presented to investigate the values of this new class of options and illustrate the differences between the prices of vanilla catastrophe equity put options and the contracts designed in this paper. Interestingly, the prices of the new-designed contracts with different power exponents change oppositely as the intensity rises.

Keywords: Catastrophe equity put options; Catastrophe risk management; Catastrophic events; Poisson processes; G13 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:50:y:2019:i:c:s1062940819301032

DOI: 10.1016/j.najef.2019.101041

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