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Survivor Derivatives: A Consistent Pricing Framework

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Author Info

  • Paul Dawson
  • Kevin Dowd
  • Andrew J. G. Cairns
  • David Blake

Abstract

Survivorship risk is a significant factor in the provision of retirement income. Survivor derivatives are in their early stages and offer potentially significant welfare benefits to society. This article applies the approach developed by Dowd et al. (2006), Olivier and Jeffery (2004), Smith (2005), and Cairns (2007) to derive a consistent framework for pricing a wide range of linear survivor derivatives, such as forwards, basis swaps, forward swaps, and futures. It then shows how a recent option pricing model set out by Dawson et al. (2009) can be used to price nonlinear survivor derivatives, such as survivor swaptions, caps, floors, and combined option products. It concludes by considering applications of these products to a pension fund that wishes to hedge its survivorship risks. Copyright (c) The Journal of Risk and Insurance, 2010.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal Journal of Risk and Insurance.

Volume (Year): 77 (2010)
Issue (Month): 3 ()
Pages: 579-596

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Handle: RePEc:bla:jrinsu:v:77:y:2010:i:3:p:579-596

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Cited by:
  1. Blake, David & Courbage, Christophe & MacMinn, Richard & Sherris, Michael, 2011. "Longevity risks and capital markets: The 2010-2011 update," MPRA Paper 34279, University Library of Munich, Germany.
  2. Blake, David & Brockett, Patrick & Cox, Samuel & MacMinn, Richard, 2011. "Longevity risk and capital markets: The 2009-2010 update," MPRA Paper 28868, University Library of Munich, Germany.
  3. Boyer, M. Martin & Stentoft, Lars, 2013. "If we can simulate it, we can insure it: An application to longevity risk management," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 35-45.
  4. Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "Valuation and hedging of the ruin-contingent life annuity (RCLA)," Papers 1205.3686, arXiv.org.
  5. Yang, Sharon S. & Wang, Chou-Wen, 2013. "Pricing and securitization of multi-country longevity risk with mortality dependence," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 157-169.
  6. Wong, Tat Wing & Chiu, Mei Choi & Wong, Hoi Ying, 2014. "Time-consistent mean–variance hedging of longevity risk: Effect of cointegration," Insurance: Mathematics and Economics, Elsevier, vol. 56(C), pages 56-67.

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