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The 3-step hedge-based valuation: fair valuation in the presence of systematic risks

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  • Linders, Daniël

Abstract

In this paper, we introduce the 3-step hedge-based valuation for the valuation of hybrid claims. We consider an insurance portfolio which is exposed to traded risks, diversifiable risks and non-traded systematic risks. The class of 3-step hedge-based valuations is equivalent with the class of fair valuations. Closed-form solutions are derived for a portfolio of unit-linked contracts under the assumption of independence between financial and non-financial risks. We also consider the additive 3-step valuation and show that this additive valuation is a member of the more general class of 3-step hedge-based valuations.

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  • Linders, Daniël, 2023. "The 3-step hedge-based valuation: fair valuation in the presence of systematic risks," ASTIN Bulletin, Cambridge University Press, vol. 53(2), pages 418-442, May.
    • Handle: RePEc:cup:astinb:v:53:y:2023:i:2:p:418-442_11
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    Cited by:

    1. Francesco Della Corte & Gian Paolo Clemente & Nino Savelli, 2023. "A cohort-based Partial Internal Model for demographic risk," Papers 2307.03090, arXiv.org.

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