The CBOT catastrophe option is designed as a spread option based on an index of underwriting property losses experienced by a large pool of insurers. Its spread feature combines a long call position with a low exercise price with a short call position at a higher exercise price. As a result, losses less than the lower exercise price and greater than the higher exercise prices are uninsured, creating a net payoff similar to an insurance policy with a deductible and co-insurance feature. Long puts and covered calls do not have spread-like payoffs. |
