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Solvency

Author

Listed:
  • Mario V. Wüthrich

    (ETH Zurich)

  • Michael Merz

    (University of Hamburg)

Abstract

In this chapter we merge all available financial positions to the full balance sheet approach. To avoid inconsistencies it is crucial that the same state price deflator (and valuation method) is applied to all financial positions of the balance sheet. The solvency consideration then adds a dynamic component to the problem, namely, it considers the question whether the values of the liabilities are covered by asset values also in one year’s time from today. We start this chapter by introducing risk measures that analyze the dynamic question under stress scenarios. Then we define the notions of solvency and acceptability which are supplemented by many examples in asset-and-liability management. We discuss the limited liability option of shareholders, provide insight on dividend payment rules. We analyze hedging financial risk with the Margrabe option and we discuss portfolio optimization under solvency constraints.

Suggested Citation

Handle: RePEc:spr:sprfcp:978-3-642-31392-9_9
DOI: 10.1007/978-3-642-31392-9_9
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