Model-Independent Price Bounds for Catastrophic Mortality Bonds

Abstract: In this paper, we are concerned with the valuation of Catastrophic Mortality Bonds and, in particular, we examine the case of the Swiss Re Mortality Bond 2003 as a primary example of this class of assets. This bond was the first Catastrophic Mortality Bond to be launched in the market and encapsulates the behaviour of a well-defined mortality index to generate payoffs for bondholders. Pricing these type of bonds is a challenging task and no closed form solution exists in the literature. In our approach, we express the payoff of such a bond in terms of the payoff of an Asian put option and present a new approach to derive model-independent bounds exploiting comonotonic theory as illustrated in \cite{prime1}, \cite{2} and \cite{Simon} for the pricing of Asian options. We carry out Monte Carlo simulations to estimate the bond price and illustrate the quality of the bounds.