Analytical valuation of catastrophe equity options with negative exponential jumps

Lung-fu Chang and Mao-wei Hung

Insurance: Mathematics and Economics, 2009, vol. 44, issue 1, 59-69

Abstract: A catastrophe put option is valuable in the event that the underlying asset price is below the strike price; in addition, a specified catastrophic event must have happened and influenced the insured company. This paper analyzes the valuation of catastrophe put options under deterministic and stochastic interest rates when the underlying asset price is modeled through a Lévy process with finite activity. We provide explicit analytical formulas for evaluating values of catastrophe put options. The numerical examples illustrate how financial risks and catastrophic risks affect the prices of catastrophe put options.

Keywords: Catastrophe; derivatives; Lévy; process; Stochastic; interest; rate; Reinsurance; Option; pricing (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:44:y:2009:i:1:p:59-69

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