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Article overview
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Managing Systematic Mortality Risk in Life Annuities: An Application of Longevity Derivatives | Man Chung Fung
; Katja Ignatieva
; Michael Sherris
; | Date: |
1 Aug 2015 | Abstract: | This paper assesses the hedge effectiveness of an index-based longevity swap
and a longevity cap. Although swaps are a natural instrument for hedging
longevity risk, derivatives with non-linear pay-offs, such as longevity caps,
also provide downside protection. A tractable stochastic mortality model with
age dependent drift and volatility is developed and analytical formulae for
prices of these longevity derivatives are derived. Hedge effectiveness is
considered for a hypothetical life annuity portfolio. The hedging of the life
annuity portfolio is comprehensively assessed for a range of assumptions for
the market price of longevity risk, the term to maturity of the hedging
instruments, as well as the size of the underlying annuity portfolio. The model
is calibrated using Australian mortality data. The results provide a
comprehensive analysis of longevity hedging, highlighting the risk management
benefits and costs of linear and nonlinear payoff structures. | Source: | arXiv, 1508.0090 | Services: | Forum | Review | PDF | Favorites |
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