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Semi-static hedging of variable annuities

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  • Bernard, Carole
  • Kwak, Minsuk

Abstract

This paper focuses on hedging financial risk in variable annuities with guarantees. We show that insurers should incorporate the specificity of the periodic payment of variable annuities fees to best hedge embedded guarantees and should focus on hedging the net liability. We develop a new hedging strategy based on semi-static hedging techniques, which takes into account the periodically collected fees, and confirm that it is more effective than delta-hedging with same rebalancing dates, as well as traditional semi-static hedging strategies that do not consider the specificity of the payments of fees in their optimization. It is also verified that short-selling or using put options as hedging instruments allows more effective hedging.

Suggested Citation

  • Bernard, Carole & Kwak, Minsuk, 2016. "Semi-static hedging of variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 173-186.
  • Handle: RePEc:eee:insuma:v:67:y:2016:i:c:p:173-186
    DOI: 10.1016/j.insmatheco.2016.01.004
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    References listed on IDEAS

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    1. repec:eee:insuma:v:79:y:2018:i:c:p:43-56 is not listed on IDEAS

    More about this item

    Keywords

    Effective hedging; Variable annuities; Semi-static hedging; Periodic fees; Embedded guarantees;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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