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Quantile hedging and its application to life insurance

  • Melnikov Alexander
  • Skornyakova Victoria
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    The paper develops the method of quantile hedging in a two-factor jump-diffusion market. The exact formulae of the maximal successful hedging set for an option to exchange one asset for another are given. These results are applied to a class of equity-linked life insurance contracts called “pure endowments with a guarantee”. In our setting, the pay-off functions of these insurance contracts are equal to the maximum of two risky assets in a two-factor jump-diffusion model conditioned by the survival status of the insured. The first asset is responsible for the maximal size of future profits, while the second provides a flexible guarantee to the insured. Based on quantile hedging methodology and a generalized Margrabe's formula, the paper describes the valuation and risk management of such mixed finance-insurance instruments.

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    File URL: http://www.degruyter.com/view/j/stnd.2005.23.issue-4_2005/stnd.2005.23.4.301/stnd.2005.23.4.301.xml?format=INT
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    Article provided by De Gruyter in its journal Statistics & Risk Modeling.

    Volume (Year): 23 (2005)
    Issue (Month): 4/2005 (April)
    Pages: 301-316

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    Handle: RePEc:bpj:strimo:v:23:y:2005:i:4/2005:p:301-316:n:3
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