An accurate lattice model for pricing catastrophe equity put under the jump-diffusion process

Abstract

A catastrophe equity put (CatEPut) is constructed to recapitalize an insurance company that suffers huge compensation payouts due to catastrophic events (CEs). The company can exercise its CatEPut to sell its stock to the counterparty at a predetermined price when its accumulated loss due to CEs exceeds a predetermined threshold and its own stock price falls below the strike price.