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Analytical valuation of catastrophe equity options with negative exponential jumps

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  • Chang, Lung-fu
  • Hung, Mao-wei
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.

Suggested Citation

  • Chang, Lung-fu & Hung, Mao-wei, 2009. "Analytical valuation of catastrophe equity options with negative exponential jumps," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 59-69, February.
    • Handle: RePEc:eee:insuma:v:44:y:2009:i:1:p:59-69
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    References listed on IDEAS

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    Cited by:

    1. Bi, Hongwei & Wang, Guanying & Wang, Xingchun, 2019. "Valuation of catastrophe equity put options with correlated default risk and jump risk," Finance Research Letters, Elsevier, vol. 29(C), pages 323-329.
    2. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    3. Kim, Hwa-Sung & Kim, Bara & Kim, Jerim, 2014. "Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses," Economic Modelling, Elsevier, vol. 41(C), pages 15-22.
    4. Yu, Jun, 2015. "Catastrophe options with double compound Poisson processes," Economic Modelling, Elsevier, vol. 50(C), pages 291-297.
    5. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    6. Xingchun Wang, 2016. "The Pricing of Catastrophe Equity Put Options with Default Risk," International Review of Finance, International Review of Finance Ltd., vol. 16(2), pages 181-201, June.
    7. Wang, Xingchun, 2016. "Catastrophe equity put options with target variance," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 79-86.
    8. Wang, Xingchun, 2020. "Catastrophe equity put options with floating strike prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    9. Massimo Arnone & Michele Leonardo Bianchi & Anna Grazia Quaranta & Gian Luca Tassinari, 2021. "Catastrophic risks and the pricing of catastrophe equity put options," Computational Management Science, Springer, vol. 18(2), pages 213-237, June.
    10. Wang, Xingchun, 2019. "Valuation of new-designed contracts for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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