Pricing the Risk-Transfer Financial Instruments via Monte Carlo Methods
Abstract
The paper is devoted to finding the present value of catastrophe bonds using a combination of Monte Carlo and Iterative Stochastic Equation methods. Apart from general methodology, three practical examples of catastrophe bonds connected with earthquakes are also considered. For these examples algorithms in pseudocode with procedures originated from catastrophe simulation software are provided. The methodology presented in this paper maybe also used for other types of risk-transfer financial instruments. Some of these possibilities are described.