Handbook of Quantitative Finance and Risk Management

This study reviews the valuation models for three types of catastrophe-linked instruments: catastrophe bonds, catastrophe equity puts, and catastrophe futures and options. First, it looks into the pricing of catastrophe bonds under stochastic interest rates and examines how (re)insurers can apply catastrophe bonds to reduce the default risk. Second, it models and values the catastrophe equity puts that give the (re)insurer the right to sell its stocks at a predetermined price if catastrophe losses surpass a trigger level. Third, this study models and prices catastrophe futures and catastrophe options contracts that are based on a catastrophe index.