Question: Your catastrophe modeling company assures you that
2) (60 points) your catastrophe modeling company assures you that there is a 1 in 100 chance of your offshore oil-drilling platform in the South China Sea being destroyed by a typhoon. You could use a cat bond to cover this $1 billion risk. If the interest on the bond is LIBOR plus 9% and LIBOR is running at 4%, how much will interest payments on the bond cost you each year?
3) (20 points) the bond in question 2 has a parametric trigger based on the maximum wind speed at the location of your drilling platform. Will this bond cover your losses if a foreign state claims the waters you are drilling in and sends troops to take command of your drilling platform?
