A Research On Pricing Methods Of Catastrophe Option Of Catastrohpe Risk Securitization

In recent years, with the growth of population and environment pollution, more and more catastrophe risk events have taken place in the world. The concept of risk management has developed with more exposure to catastrophe events. How to handle with these catastrophe risks efficiently has become an important problem for (Re)insurance industry and government. With the rapid development of financial and capital markets, catastrophe option has been created, and this product provides much wide space to diversify catastrophe risks.Although catastrophe option has been an important product of diversifying risks, but the market is still not well launched. The main reason consists in that catastrophe option is difficult to price exactly. This dissertation aims at studying the problem of pricing catastrophe option.Firstly, begun with the evolvement of catastrophe risks, the shortage of traditional (Re) insurance in coping with catastrophe risks is analyzed, and relevant theories about pricing catastrophe option and securitization have been studied.Secondly, based on examining the true transaction data – catastrophe option traded at the Chicago Board of Trade (CBOT) between 1996 and 1999, theoretical prices are derived by assuming a complete and arbitrage free market, and market prices are compared to the market prices. Thirdly, we investigate the valuation of catastrophe option. The option is priced relative to insurance premiums that are written on the same underlying risks to exclude any arbitrage opportunities. We derive a representation of those catastrophe option price processes that are actuarially consistent and determine several situations in which actuarial consistency leads to a complete market for catastrophe option. Fourthly, based on consideration two main problems, a model is derived for pricing catastrophe option which allows for heavy tails. We derives such a model by modeling the logarithms of the loss process as a compound Poisson process with exponential distributed marks in the loss period and with normal distributed marks in the development period. The price is then found by evaluating the future payout of catastrophe option under the risk neutral measure derived by the Esscher approach.Fifthly, We introduce the concept of Asian option into catastrophe market. With regard the average of catastrophe loss index as underlying, the model of pricing catastrophe option has been built, and the approach of finite difference schemes with characteristic line is put forward to calculate the prices. Finally, the contents of research and the conclusions of this dissertation are summarized, and the prospects for future research directions are presented.