Pricing perpetual American CatEPut options when stock prices are correlated with catastrophe losses

Abstract

A catastrophe equity put (CatEPut) option is a catastrophe derivative that allows insurance companies to raise equity capital when they face catastrophe losses. This study focuses on a pricing model for a CatEPut options. First, unlike previous research, this study provides a CatEPut option pricing model in which stock prices and catastrophe losses are moderately correlated. Second, this study examines the practical characteristics of American CatEPut options. Third, through a numerical analysis, we observe that it is necessary to consider the effects of a Moderate correlation between stock prices and catastrophe losses on the prices of perpetual American CatEPut options. (C) 2014 Elsevier B.V. All rights reserved.