Natural delta gamma hedging of longevity and interest rate risk
AbstractThe paper presents closed-form Delta and Gamma hedges for an- nuities and death assurances, in the presence of both longevity and interest-rate risk. Longevity risk is modelled through an extension of the classical Gompertz law, while interest rate risk is modelled via an Hull-and-White process. We theoretically provide natural hedg- ing strategies, considering also contracts written on di erent genera- tions. We provide a UK-population and bond-market calibrated exam- ple. We compute longevity exposures and explicitly calculate Delta- Gamma hedges. Re-insurance is needed in order to set-up portfolios which are Delta-Gamma neutral to both longevity and interest-rate risk.
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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 21-2011.
Length: 19 pages
Date of creation: Jan 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-19 (All new papers)
- NEP-IAS-2013-01-19 (Insurance Economics)
- NEP-RMG-2013-01-19 (Risk Management)
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