Valuation of structured risk management products

This paper applies valuation theory to structured risk management products. We specialize the theoretical model to two representative products, a “double trigger” put option and a property insurance with a retention which is a function of a commodity price. The double trigger refers to the fact that the option has to satisfy two conditions in order to be in the money: the underlying equity must be below the strike price and, in addition, a specified catastrophic event must have occurred and affected the insured firm. These examples illustrate how the standard valuation theory for pricing risk in an arbitrage-free market should be applied to products engineered to manage multiple risks within the firm.