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On Pricing and Hedging the No‐Negative‐Equity Guarantee in Equity Release Mechanisms

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  • Johnny Siu‐Hang Li
  • Mary R. Hardy
  • Ken Seng Tan

Abstract

In a roll‐up mortgage, the borrower receives a loan in the form of a lump sum. The loan is rolled up with interest until the borrower dies, sells the house, or moves into long‐term care permanently. The house is sold at that time, and the proceeds are used to repay the loan and interest. Most roll‐up mortgages are sold with a no‐negative‐equity guarantee (NNEG), which caps the redemption amount at the lesser of the face amount of the loan and the sale proceeds. The core of this study is to develop a framework for pricing and managing the risks of the NNEG.

Suggested Citation

  • Johnny Siu‐Hang Li & Mary R. Hardy & Ken Seng Tan, 2010. "On Pricing and Hedging the No‐Negative‐Equity Guarantee in Equity Release Mechanisms," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 499-522, June.
    • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:2:p:499-522
    DOI: 10.1111/j.1539-6975.2009.01344.x
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