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Exchange options for catastrophe risk management

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  • Wang, Guanying
  • Wang, Xingchun
  • Shao, Xinjian

Abstract

In this paper, we investigate the pricing issue and catastrophe risk management of exchange options. Exchange options allow the holder to exchange its stocks for another at maturity and can be seen as an extended version of catastrophe equity put options with another traded asset price as strike prices. Since option holders have to issue new shares to exercise the option, we illustrate the differences between option prices calculated using pre-exercise and post-exercise share prices. The effects of default risk on option prices and risk management are also considered. Finally, risk management analysis shows that exchange options can effectively hedge catastrophe risk.

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  • 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).
    • Handle: RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001832
    DOI: 10.1016/j.najef.2021.101580
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    Cited by:

    1. Battauz, Anna & De Donno, Marzia & Sbuelz, Alessandro, 2022. "On the exercise of American quanto options," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Catastrophe risk; Exchange options; Catastrophic events; Poisson processes;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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