Use the Structural Model to Evaluate Catastrophe Equity Put

• Main Authors: Lin,Chang-Chih, 林昶志
• Other Authors: Dai,Tian-Shyr
• Format: Others
• Language: zh-TW
• Published: 2016
• Online Access: http://ndltd.ncl.edu.tw/handle/2597uk

碩士 === 國立交通大學 === 財務金融研究所 === 104 === Catastrophe equity puts (“CatEPut”) is a hedging derivative purchased by an insurance company to raising fund for compensating the loss caused by catastrophes. Insurance company pays the premium to investors to buy the option that allows it to sell its own stock at a predetermined strike price to investors in case the loss of ca-tastrophes exceeds a specific threshold and the stock price is lower than the strike price. This capital injection can finance the payments of financial claims and im-prove the financial status of the issuance company. Compared to the reinsurance contract, purchasing catastrophe equity put options does not increase the amounts of liabilities on the balance sheet of reinsurance companies which is advantageous for its credit rating. Past research like Cox (2004) evaluating CatEPut by directly de-scribing the influences of disaster on the stock price. In practice, the insurance com-pany’s compensation directly reduces the company's asset value instead The complex, nonlinear relation between the change of the stock price and the asset value due to occurrences of catastrophes is hard to be directly modeled on the stock price process. Even doing so, the model parameters are hard to be calibrated empirically. In addi-tion, past researches can only naively model the drop of the stock price due to occur-rences of catastrophes but fail to model the default of insurance company due to ina-bility to repay catastrophes’ compensations In this thesis, we assume that the firm value follows lognormal distribution、the intensity of catastrophe follows the Poisson process、 and the magnitude of loss following Zeta distribution. Then we use the Bin-Trinomial tree to model the dynamics of the asset value and use the compound option and structural model to describe the change of stock price and evaluate CatE-Put from three different viewpoints: issuer, equity holder and debt holder.