Valuation of finance/insurance contracts: Efficient hedging and stochastic interest rates modeling
This paper studies the problem of hedging equity-linked life insurance contracts with efficient hedging technique in stochastic interest economy. In our setting, the payoff of life insurance contracts is based on two risky assets, where the return processes are driven by different correlated Wiener processes. The stochastic interest rate is assumed to follow the Heath–Jarrow–Morton framework. We obtain explicit formulas for both the price of a single premium contract and the corresponding survival probability. Moreover, a numerical example illustrates how this efficient hedging technique is applied to manage the balance between financial and insurance risks for a risk-taking insurance company
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