PRICING CATASTROPHE OPTIONS WITH COUNTERPARTY CREDIT RISK IN A REDUCED FORM MODEL

Acta mathematica scientia,Series B ›› 2018, Vol. 38 ›› Issue (1): 347-360.

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PRICING CATASTROPHE OPTIONS WITH COUNTERPARTY CREDIT RISK IN A REDUCED FORM MODEL

Yajuan XU^1,2, Guojing WANG¹

1. The Center for Financial Engineering and Department of Mathematics, Soochow University, Suzhou 215006, China;
2. School of Mathematics and Physics, Suzhou Vocational University, Suzhou 215104, China

Received:2015-04-27 Revised:2017-01-03 Online:2018-02-25 Published:2018-02-25
Supported by:
This work was supported by the National Natural Science Foundation of China (11371274).

Abstract

Abstract: In this paper, we study the price of catastrophe options with counterparty credit risk in a reduced form model. We assume that the loss process is generated by a doubly stochastic Poisson process, the share price process is modeled through a jump-diffusion process which is correlated to the loss process, the interest rate process and the default intensity process are modeled through the Vasicek model. We derive the closed form formulae for pricing catastrophe options in a reduced form model. Furthermore, we make some numerical analysis on the explicit formulae.

Key words: pricing, catastrophe option, counterparty risk, measure change, reduced form model

Yajuan XU, Guojing WANG. PRICING CATASTROPHE OPTIONS WITH COUNTERPARTY CREDIT RISK IN A REDUCED FORM MODEL[J].Acta mathematica scientia,Series B, 2018, 38(1): 347-360.

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PRICING CATASTROPHE OPTIONS WITH COUNTERPARTY CREDIT RISK IN A REDUCED FORM MODEL

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