Abstract
Global warming has caused the surface of most tropical oceans to warm up, inducing an increasing number of deadly hurricanes and typhoons. Since Hurricane Katrina, new hurricane derivative contracts have been introduced for insurers and related parties to mitigate their climate risk exposures. We develop a novel triply-binomial valuation model as an extension of Gerber's (1984, 1988) doubly-binomial framework with a third binomial process to subsume stochastic hurricane arrivals. We subsequently simulate how global warming with an increasing number of deadly tropical cyclones has made these derivative contracts more valuable in performing their hedging function.
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