2. Explain how CAT bonds work. Assume the risk-free rate is 1.25%. The risk premiums of a CAT bond are given by the Cobb-Douglas function: RP = A (Probability)" (Severity) = Assuming Probability = 0.01 and Severity = 0.67, construct three Tables i. ii. iii. By varying A from 0.15 to 0.95 in steps of 0.1 By varying a from 0.15 to 0.95 in steps of 0.1 By varying from 0.15 to 0.95 in steps of 0.1 Comment on what trends you observe. 2. Explain how CAT bonds work. Assume the risk-free rate is 1.25%. The risk premiums of a CAT bond are given by the Cobb-Douglas function: RP = A (Probability)" (Severity) = Assuming Probability = 0.01 and Severity = 0.67, construct three Tables i. ii. iii. By varying A from 0.15 to 0.95 in steps of 0.1 By varying a from 0.15 to 0.95 in steps of 0.1 By varying from 0.15 to 0.95 in steps of 0.1 Comment on what trends you observe