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New explicit closed form formulae for the prices of catastrophe options

Author

Listed:
  • Yunguo Jin

    (School of Statistics, Chengdu University of Information Technology, Chengdu, Sichuan 610103, P. R. China)

  • Shouming Zhong

    (School of Statistics, Chengdu University of Information Technology, Chengdu, Sichuan 610103, P. R. China;
    School of Mathematical Sciences, University of Electronic Science and Technology of China, Chengdu, Sichuan 611731, P. R. China)

Abstract

The paper presents an approach of probability measure changes to the pricing of catastrophe options with counterparty risk and new catastrophe option pricing formulae. According to our knowledge, there still does not exist a literature to present the approach of probability measure changes to option pricing when underlying stock returns are discontinuous (in particular, catastrophe options). We shall see that sometimes it is convenient to change the risk-neutral measures. Furthermore, our models and results have potential improvements. Finally, we use Monte Carlo method to the analog calculation of the formulae, and demonstrate how financial risks and catastrophic risks affect the price of the catastrophe options.

Suggested Citation

  • Yunguo Jin & Shouming Zhong, 2015. "New explicit closed form formulae for the prices of catastrophe options," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(02), pages 1-16.
    • Handle: RePEc:wsi:ijfexx:v:02:y:2015:i:02:n:s2424786315500176
    DOI: 10.1142/S2424786315500176
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