An options pricing method based on the atmospheric environmental health index: an example from SO2

Zhao, Laijun; Wang, Chenchen; Yang, Yong; Xue, Jian; Li, Deqiang

An options pricing method based on the atmospheric environmental health index: an example from SO2

2021

Zhao, Laijun | Wang, Chenchen | Yang, Yong | Xue, Jian | Li, Deqiang

Environmental finance has gradually become an important tool for solving atmospheric pollution problems. The creation of options based on an atmospheric environmental health index (AEHI) is designed to support a rational pricing of financial products related to the health of the atmospheric environment. To begin with, the improved Ornstein-Uhlenbeck model is established to predict the change in air pollutant concentrations, and then we construct the AEHI by using exposure-response Poisson regression model. In addition, an options pricing method for AEHI is proposed based on Esscher transform theory, and the universal investment strategy for enterprises is formulated to hedge operational risk by using the AEHI option. Finally, we use Beijing city of China, as a case study to demonstrate how to determine the AEHI options prices for two diseases in three age groups, and propose the investment strategy for an insurance enterprise. The AEHI options should therefore be used to compensate for the damage to human health caused by air pollution, and to hedge against the operational risks of related industries.

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