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A closed-form pricing formula for catastrophe equity options
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- Journal:
- Probability in the Engineering and Informational Sciences / Volume 36 / Issue 4 / October 2022
- Published online by Cambridge University Press:
- 15 July 2021, pp. 1103-1115
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- Article
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In this article, we derive a closed-form pricing formula for catastrophe equity put options under a stochastic interest rate framework. A distinguishing feature of the proposed solution is its simplified form in contrast to several recently published formulae that require evaluating several layers of infinite sums of
$n$-fold convoluted distribution functions. As an application of the proposed formula, we consider two different frameworks and obtain the closed-form formula for the joint characteristic function of the asset price and the losses, which is the only required ingredient in our pricing formula. The prices obtained by the newly derived formula are compared with those obtained using Monte-Carlo simulations to show the accuracy of our formula.
