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Catastrophe equity put options with floating strike prices

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  • Wang, Xingchun

Abstract

In this study, we extend the results in Cox et al. (2004) by considering floating strike prices, which are affected by accumulated losses. We employ a compound Poisson process to describe catastrophe losses and adopt a mean-reverting square root process to capture the volatility of the underlying stock. In the numerical section, we first compare the differences in the prices of the options with fixed and floating strike prices. In addition, we illustrate the variance of the portfolios consisting of the stock and options with alternative kinds of strike prices by holding the total cost of the options constant. Variance-optimal portfolios are also investigated. Interestingly, numerical results show that the portfolios consisting of the stock and options with floating strike prices have lower variances in all cases, even when we hold the total option costs constant.

Suggested Citation

  • Wang, Xingchun, 2020. "Catastrophe equity put options with floating strike prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s106294082030108x
    DOI: 10.1016/j.najef.2020.101211
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    Cited by:

    1. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
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    More about this item

    Keywords

    Catastrophe equity put options; Floating strike prices; Catastrophe risk management; Poisson processes;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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