Pricing of catastrophe bond in fuzzy framework

Abstract

In the paper we consider catastrophe bonds with a stepwise payoff structure. We use the martingale method to price it under the condition of no arbitrage. We assume a stochastic form of the spot interest rate, replicability of interest rate changes by financial instruments existing in the market as well as independence between a catastrophe occurrence and behaviour of the financial market. The fuzzy sets approach, presented in the paper, may incorporate expertise knowledge to overcome lack of precise data in the discussed case. © Springer-Verlag 2013.