Research On Pricing Model Of Catastrophe Option

In this paper we concern with the problem of catastrophe option pricing based on seismic risk. Apply the techniques of financial mathematics and financial engineering to establish pricing formula of catastrophe option, by use of the principle of martingale process, stochastic process theory and dynamic asset pricing theory.Firstly, catastrophe option will be regarded as the double trigger option according to dynamic asset pricing theory. Apply the principle of martingale process and stochastic process theory to establish pricing formula of catastrophe option based on losses distribution of earthquake disasters. Whether the times of losses are known or not, establish formulas of catastrophe option separately, according to the characteristics of seismic risk.Secondly, in this paper we collected the data and information in 1978-2006 of seismic losses. We regarded the earthquake disasters occurred during 1978 to 2006 as sample, amount of direct losses and annual times of earthquake as index. Establish earthquake disaster losses distribution function based on seismic risk in China. Examples show good effect on option pricing formula.Finally, make pertinent suggestions about catastrophe option pricing formula, considering that factors beyond the model have an impact on price of option.