Contingent Claim Pricing with Applications to Financial Risk Management

• Main Author: Chen, Hua
• Format: Others
• Published: Digital Archive @ GSU 2008
• Subjects: Financial Risk Management; Real Option Valuation; Mortality Securitization; Reverse Mortgage; Contingent Claim Pricing; Insurance
• Online Access: http://digitalarchive.gsu.edu/rmi_diss/22; http://digitalarchive.gsu.edu/cgi/viewcontent.cgi?article=1021&context=rmi_diss

Contingent Claim Pricing with Applications to Financial Risk Management By Hua Chen 2008 Committee Chair: Samuel H. Cox and Shaun Wang Major Academic Unit: Department of Risk Management and Insurance This is a multi-essay dissertation designed to explore the contingent claim pricing theory with non-tradable underlying assets, with emphasis on its applications to insurance and risk management. In the first essay, I apply the real option pricing theory and dynamic programming methods to address problems in the area of operational risk management. Particularly, I develop a two-stage model to help firms determine optimal switching triggers in the event of an influenza epidemic. In the second essay, I examine mortality securitization in an incomplete market framework. I build a jump-diffusion process into the original Lee-Carter model and explore alternative model with transitory versus permanent jump effects. I discuss pricing difficulties of the Swiss Re mortality bond (2003) and use the Wang transform to account for correlations of the mortality index over time. In the third essay, I study the valuation of the non-recourse provision in reverse mortgages. I model the various risks embedded in the HECM program and apply the conditional Esscher transform to price the non-recourse provision. I further examine the premium structure of HECM loans and investigate whether insurance premiums are adequate to cover expected claims.