Catastrophe equity put options with floating strike prices |
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| Institution: | 1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China;1. Western Kentucky University, Bowling Green KY42101, USA;2. Utah Valley University, Orem, UT 84058, USA;3. Indiana Business Research Center, Indiana University, Bloomington, IN 47405, USA;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China;1. Department of Public Finance, National Chengchi University, No. 64, Sec. 2, Zhi-nan Rd, Wenshan, 11605 Taipei, Taiwan;2. Department of Business Administration, Chung Yuan Christian University, No. 200, Chung-pei Rd, Chung-li, 32023 Taoyuan, Taiwan;3. Department of Accountancy, City University of Hong Kong, 88 Tat Chee Avenue, Kowloon Tong, Hong Kong;1. School of Securities and Futures, Southwestern University of Finance and Economics, China;2. Department of Finance, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, ROC;3. School of Securities and Futures, Southwestern University of Finance and Economics, No. 55, Guanghuacun Street, Chengdu, Sichuan 610074, China |
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| 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. |
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| Keywords: | Catastrophe equity put options Floating strike prices Catastrophe risk management Poisson processes G13 |
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