An Options Pricing Method Based on the Atmospheric Environmental Health Index

Abstract

Background: 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.Method: First, the improved Ornstein-Uhlenbeck model is established to predict the change in air pollutant concentrations, and then the AEHI is constructed using exposure-response Poisson regression model. Then, an options pricing method for AEHI is proposed based on Esscher transform theory. Finally, the investment strategy for enterprises is formulated to hedge operational risk by using the AEHI option.Results: AEHI options prices were determined for two diseases in each of three age groups using Beijing, China, as a case study, and AEHI option is applied to recompense for human health losses and hedge operating risk for an insurance enterprise.Conclusion: 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 such as insurance.