Valuation of Double Trigger Catastrophe Options with Counterparty Risk

53 Pages Posted: 29 Mar 2012 Last revised: 29 Aug 2013

See all articles by Sheng-Yung Yang

Sheng-Yung Yang

National Chung Hsing University - Department of Finance

I-Ming Jiang

Faculty of Finance, College of Management, Yuan Ze University

Yu-Hong Liu

National Cheng Kung University

Alan T. Wang

National Cheng Kung University - Graduate Institute of Finance

Date Written: March 29, 2012

Abstract

This study presents a novel catastrophe option pricing model that considers counterparty risk. Asset prices are modeled through a jump-diffusion process which is correlated to counterparty loss process and collateral assets. Because of the long term of catastrophe options, this study also examines the model in the stochastic interest rate environment. The numerical results indicate that counterparty risk significantly affects the value of options. Recently, numerous serious financial events have demonstrated the importance of counterparty risk when valuing financial products.

Keywords: Catastrophe, Stochastic Interest Rate, Counterparty Risk, Compound Poison

JEL Classification: G12

Suggested Citation

Yang, Sheng-Yung and Jiang, I-Ming and Liu, Yu-Hong and Wang, Alan T., Valuation of Double Trigger Catastrophe Options with Counterparty Risk (March 29, 2012). Available at SSRN: https://ssrn.com/abstract=2030772 or http://dx.doi.org/10.2139/ssrn.2030772

Sheng-Yung Yang (Contact Author)

National Chung Hsing University - Department of Finance ( email )

250 Kuo Kuang Road
Taichung, 402
Taiwan
+886-4-22850940 (Phone)
+886-4-22856015 (Fax)

I-Ming Jiang

Faculty of Finance, College of Management, Yuan Ze University ( email )

No. 135, Far-East Road,
Chung-Li, Taoyuan, 32003
Taiwan
886-3-4638800 ext. 3662 (Phone)
886-3-4633824 (Fax)

Yu-Hong Liu

National Cheng Kung University ( email )

No.1, University Road
Tainan
Taiwan

Alan T. Wang

National Cheng Kung University - Graduate Institute of Finance ( email )

1 Univeristy Road
Tainan City, Taiwan 70101
Taiwan

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