Pricing and Risk Management of Multi-Assets Financial Instruments to Natural Disasters
Emerging Markets Finance and Trade
; 2023.
Article
in English
| Scopus | ID: covidwho-2313524
ABSTRACT
COVID-19 not only led to a significant loss of human lives but also brought indelible economic loss. To transfer the natural disaster risk, a variety of financial instruments written on the environmental phenomena have been developed and issued by financial institutions. The gamma distribution family is characterized by sparsity, heavy tail, and high skewness;thus, it has been widely used to model the data of environmental phenomena. To exploit the versatility of the gamma distribution, Vitiello and Poon propose the pricing model for financial instruments under the general equilibrium risk neutral valuation relationship (RNVR) framework. Though the VP model is capable of pricing financial instruments, their underlying is limited to a single asset. However, the vast majority of firms face various risks and prefer more efficient and cheaper ways to hedge these risks and maintain financial stability. To price multiple-asset financial instruments, this study extends the single-asset VP model to a multi-asset VP model (MVP) under the RNVR framework. Based on the MVP model, this study demonstrates two applications to price basket options and spread options. To manage the pricing of financial instruments that do not have closed-form pricing formulas, this study develops the Monte Carlo simulation method within the MVP model framework. For risk management, this study provides hedge ratios for market practitioners to manage their risk exposures. © 2023 Taylor & Francis Group, LLC.
Full text:
Available
Collection:
Databases of international organizations
Database:
Scopus
Type of study:
Prognostic study
Language:
English
Journal:
Emerging Markets Finance and Trade
Year:
2023
Document Type:
Article
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