Mathematical Modeling of Earthquake Bond for ManagingFinancial Risk Caused by Earthquake

This paper aims at developing a decision model of how much bonds should the government issue, how much should an annual interest rate and principal rate guarateed be.Firstly, financial risk on the government caused by a big earthquake is described and earthquake bond is defined.Then, by using nonlinear programming a decision model is formulated.In this model the government tries to minimize the financial risk described by the variance on payment subject to the constraint on the expectation on payment by the government and subject to the constraint that the earthquake bond is more attractive for the investor than the other investment plan.Some numerical examples are included for the case of Hanshin-Awaji earthquake.