Definition of "Cat spread"

Deborah Nance real estate agent
Deborah Nance, Real Estate Agent Pittman & Associates Realtors

Type of derivative traded on the Chicago Board of Trade that takes the form of an option on a catastrophe futures contract using a call-option spread as the basis for the contract. The thesis of this kind of derivative is to simulate an artificial layer of excess of loss reinsurance coverage. This derivative has the origin of its value in the excess of loss reinsurance plan to be used as a mechanism for the primary insurer hedging its risk coverage.


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