Pricing Hurricane Bonds Using a Physically Based Option Pricing Approach

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<title>Pricing Hurricane Bonds Using a Physically Based Option Pricing Approach</title>
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<namePart>Chang, Carolyn W.</namePart>
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<namePart>Chang, Jack S. K.</namePart>
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<namePart>Yu, Min-Teh</namePart>
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<abstract displayLabel="Summary">Hurricane bonds are unique in that they are structured with a dual exercise condition: a physically based condition that the underlying hurricane makes landfall at a prespecified location, and a standard moneyness condition that they end in the money. As the time of landfall is uncertain, their maturities are also uniquely random. This research thus proposes a modeling methodology to solve this option-pricing problemthat is, to price hurricane bonds at the nexus of atmospheric science and finance by integrating hurricane risk modeling and option pricing modeling. We resolve this dual exercise/random maturity issue by implementing a coupled hurricane generator to simulate hurricane synthetic tracks, intensity, radius, two-dimensional wind fields, and hurricane-index value evolution along the tracks. We price the increasingly popular parametric and parametric-index hurricane bonds by Monte Carlo simulations, as the underlying hurricane indices are untraded and thus replication pricing is not viable.

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<note type="statement of responsibility">Carolyn W. Chang, Jack S. K. Chang, Min-Teh Yu</note>
<subject xmlns:xlink="http://www.w3.org/1999/xlink" xlink:href="MAPA20080551254">
<topic>Huracanes</topic>
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<subject xmlns:xlink="http://www.w3.org/1999/xlink" xlink:href="MAPA20210022784">
<topic>Fijación</topic>
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<subject xmlns:xlink="http://www.w3.org/1999/xlink" xlink:href="MAPA20080545062">
<topic>Precios</topic>
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<topic>Cálculo actuarial</topic>
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<title>North American actuarial journal</title>
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<publisher>Schaumburg : Society of Actuaries, 1997-</publisher>
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<identifier type="issn">1092-0277</identifier>
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<text>07/03/2022 Tomo 26 Número 1 - 2022 , p. 27-42</text>
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