Description: This paper examines the pricing of catastrophe risk bonds. Catastrophe risk cannot be hedged by traditional securities. Therefore the pricing of catastrophe risk bonds requires an incomplete markets setting and this creates special difficulties in the pricing methodology. The paper briefly discusses the theory of equilibrium pricing and its relationship to the standard arbitrage-free valuation framework. Equilibrium pricing theory is used to develop a pricing method based on a model of the term structure of interest rates and a probability structure for the catastrophe risk. This pricing methodology can be used to assess the default spread on catastrophe risk bonds relative to traditional defaultable securities.

Description: A European call option pricing model similar to the Black-Scholes equation [1] is derived. Like the Black-Scholes equation, the model is based upon an assumption of a lognormal distribution of the price of a risky, non-dividend-paying security at a given point in the future. However, unlike Black-Scholes, the market's risk preference is recognized through a parameter that permits refinement of the model to agree either with experience or with future advances in the underlying theory.

Description: This note develops the optimality of the put option as a hedging strategy. For an investor who owns a stock, he can buy a put option to hedge against the downside risk of the stock price. In this short note, we ask two questions with the hedge strategy of the put option. First, whether the investor is better off with the hedging strategy? Second, if the investor is better off with the hedging strategy, whether it is the optimal hedging plan? Our result shows that in a risk averse world an investor will maximize his utility with buying the put option as a hedge strategy.

Description: This paper proposes to put the environment into financial markets. It explains how to do it, and why the financial approach is practically the only one able to stop and invert environmental degradation. The author concentrates on deforestation which is the largest environmental problem in the third world, and explains how to start the project and what kind of optimization problems should be solved for applications of the project.

Description: This paper examines the problem of hedging foreign exchange risk across multiple countries using currency options. The profit target requirement is formulated as a stochastic constraint in the context of a binomial lattice. Models are presented for European options. In a numerical example, five currency options are selected, allowing for long or short positions, depending on the target value.