Valuation of Double Trigger Catastrophe Options with Counterparty Risk
53 Pages Posted: 29 Mar 2012 Last revised: 29 Aug 2013
Date Written: March 29, 2012
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: Suggested Citation