Single and cross-generation natural hedging of longevity and financial risk
The paper provides natural hedging strategies among death benefits and annuities written on a single and on different generations. It obtains closed-form Delta and Gamma hedges, in the presence of both longevity and interest rate risk. We present an application to UK data on survivorship and bond dynamics. We first compare longevity and financial risk exposures: Deltas and Gammas for longevity risk are greater in absolute value than the corresponding sensitivities for interest rate risk. We then calculate the optimal hedges, both within and across generations. Our results apply to both asset and asset-liability management.
|Date of creation:||2012|
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Springer, vol. 158(2), pages 151-192, June.
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"Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305
World Scientific Publishing Co. Pte. Ltd..
- Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
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- Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
- Elisa Luciano & Luca Regis & Elena Vigna, 2011. "Delta and Gamma hedging of mortality and interest rate risk," ICER Working Papers - Applied Mathematics Series 01-2011, ICER - International Centre for Economic Research.
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