Pricing And Hedging Of Emerging Products In Finance And Insurance
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Pricing And Hedging Of Emerging Products In Finance And Insurance
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Author : Junsen Tang
language : en
Publisher:
Release Date : 2018
Pricing And Hedging Of Emerging Products In Finance And Insurance written by Junsen Tang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with Derivative securities categories.
This thesis addresses the pricing and hedging issues on the newly-developed financial and insurance products, including simplified hedges for path-dependent options, variable annuities tied with state-dependent fees, and defaultable reverse mortgage contracts. In Chapter 1, we present a method to construct a simplified alternative derivative that resembles a given highly path-dependent derivative. Path-dependent derivatives are typically difficult to hedge. Traditional dynamic delta hedging does not perform well because of the difficulty to evaluate the Greeks and the high cost of constantly rebalancing. We propose to price and hedge path-dependent derivatives by constructing simplified alternatives that preserve certain distributional properties of their terminal payoffs, and that can be hedged by semi-static replication. The method is illustrated by a geometric Asian option and by a lookback option in the Black-Scholes setting, for which explicit forms of the simplified alternatives exist. An extension to a Heston stochastic volatility model is discussed as well. In Chapter 2, we model and study the benefits of charging state-dependent fees in variable annuities tied to the market volatility. Variable annuities (VAs) and other long-term equity-linked insurance products are typically difficult to hedge in incomplete markets. A state-dependent fee structure tied to market volatility is proposed in these products to contribute to the risk sharing mechanism between policyholders and insurers and also to reduce the hedging difficulty. We provide criteria for the fair-fee determination in the context of reducing the risk related to writing the VA contract. A method of optimal static hedging as a benchmark compared to other strategies is proposed in the stochastic volatility setting. We formulate our problem with guaranteed minimum accumulation benefits (GMABs), but it is also applicable to other equity-linked insurance contracts. In Chapter 3, we propose a pricing scheme based on default risk models for Home Equity Conversion Mortgages (HECM). HECM Reverse mortgages are designed to allow elder homeowners aged 62 or over to convert the equity in their homes to regular revenues or a line of credit and to retain full ownership of their property for the whole life of the loan. Unlike a traditional mortgage, reverse mortgage loans do not need to be paid off as long as the borrowers remain in their home and pay due obligations such as home insurance and property taxes. HECM are non-recourse reverse mortgage loans insured by the Federal Housing Administration (FHA). HECM reverse mortgages confront a rising default risk in the wake of 2008, jeopardising the financial soundness of FHA's Mutual Mortgage Insurance Fund. The fairness of the HECM insurance premium has therefore been challenged. In this chapter, we initiate to price the reverse mortgage contract according to borrowers' individual credit and default risk. The proposed method achieves a closed-form valuation with mortality risk, interest rate risk, housing price risk, and default risk. The impact on fair HECM insurance premiums of these risks is then investigated. Our work demonstrates that the proposed pricing solution and the corresponding newly-designed rating system will provide HECM lenders a better payment arrangement for the risk management and also support the effectiveness of recent policy changes in the HECM program. The products described as above are designed in incomplete markets, which renders perfect hedging of these contracts impossible. The goal of Chapter 4 is to develop optimal static hedging in the context of minimizing the shortfall risk either for path-dependent options, hedging liabilities with insufficient budget, or hedging liabilities under the stochastic volatility environment. The shortfall risk is defined as the expectation of the potential loss from the imperfect hedging strategy, weighted by some loss function reflecting the hedger's risk preferences. In Chapter 4, we take examples on the Asian option and the GMAB contract in Chapter 2 and further develop the optimal static hedging for our products under the Heston-type stochastic volatility environment.
Actuarial Finance
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Author : Mathieu Boudreault
language : en
Publisher: John Wiley & Sons
Release Date : 2019-04-09
Actuarial Finance written by Mathieu Boudreault and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-04-09 with Mathematics categories.
A new textbook offering a comprehensive introduction to models and techniques for the emerging field of actuarial Finance Drs. Boudreault and Renaud answer the need for a clear, application-oriented guide to the growing field of actuarial finance with this volume, which focuses on the mathematical models and techniques used in actuarial finance for the pricing and hedging of actuarial liabilities exposed to financial markets and other contingencies. With roots in modern financial mathematics, actuarial finance presents unique challenges due to the long-term nature of insurance liabilities, the presence of mortality or other contingencies and the structure and regulations of the insurance and pension markets. Motivated, designed and written for and by actuaries, this book puts actuarial applications at the forefront in addition to balancing mathematics and finance at an adequate level to actuarial undergraduates. While the classical theory of financial mathematics is discussed, the authors provide a thorough grounding in such crucial topics as recognizing embedded options in actuarial liabilities, adequately quantifying and pricing liabilities, and using derivatives and other assets to manage actuarial and financial risks. Actuarial applications are emphasized and illustrated with about 300 examples and 200 exercises. The book also comprises end-of-chapter point-form summaries to help the reader review the most important concepts. Additional topics and features include: Compares pricing in insurance and financial markets Discusses event-triggered derivatives such as weather, catastrophe and longevity derivatives and how they can be used for risk management; Introduces equity-linked insurance and annuities (EIAs, VAs), relates them to common derivatives and how to manage mortality for these products Introduces pricing and replication in incomplete markets and analyze the impact of market incompleteness on insurance and risk management; Presents immunization techniques alongside Greeks-based hedging; Covers in detail how to delta-gamma/rho/vega hedge a liability and how to rebalance periodically a hedging portfolio. This text will prove itself a firm foundation for undergraduate courses in financial mathematics or economics, actuarial mathematics or derivative markets. It is also highly applicable to current and future actuaries preparing for the exams or actuary professionals looking for a valuable addition to their reference shelf. As of 2019, the book covers significant parts of the Society of Actuaries’ Exams FM, IFM and QFI Core, and the Casualty Actuarial Society’s Exams 2 and 3F. It is assumed the reader has basic skills in calculus (differentiation and integration of functions), probability (at the level of the Society of Actuaries’ Exam P), interest theory (time value of money) and, ideally, a basic understanding of elementary stochastic processes such as random walks.
Equity Linked Life Insurance
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Author : Alexander Melnikov
language : en
Publisher: CRC Press
Release Date : 2017-09-07
Equity Linked Life Insurance written by Alexander Melnikov and has been published by CRC Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-09-07 with Business & Economics categories.
This book focuses on the application of the partial hedging approach from modern math finance to equity-linked life insurance contracts. It provides an accessible, up-to-date introduction to quantifying financial and insurance risks. The book also explains how to price innovative financial and insurance products from partial hedging perspectives. Each chapter presents the problem, the mathematical formulation, theoretical results, derivation details, numerical illustrations, and references to further reading.
Investment Guarantees
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Author : Mary Hardy
language : en
Publisher: John Wiley & Sons
Release Date : 2003-04-07
Investment Guarantees written by Mary Hardy and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003-04-07 with Business & Economics categories.
A comprehensive guide to investment guarantees in equity-linked life insurance Due to the convergence of financial and insurance markets, new forms of investment guarantees are emerging which require financial service professionals to become savvier in modeling and risk management. With chapters that discuss stock return models, dynamic hedging, risk measures, Markov Chain Monte Carlo estimation, and much more, this one-stop reference contains the valuable insights and proven techniques that will allow readers to better understand the theory and practice of investment guarantees and equity-linked insurance policies. Mary Hardy, PhD (Waterloo, Ontario, Canada), is an Associate Professor and Associate Chair of Actuarial Science at the University of Waterloo and is a Fellow of the Institute of Actuaries and an Associate of the Society of Actuaries, where she is a frequent speaker. Her research covers topics in life insurance solvency and risk management, with particular emphasis on equity-linked insurance. Hardy is an Associate Editor of the North American Actuarial Journal and the ASTIN Bulletin and is a Deputy Editor of the British Actuarial Journal.
Banking And Financial Markets
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Author : Andrada Bilan
language : en
Publisher: Springer Nature
Release Date : 2019-11-13
Banking And Financial Markets written by Andrada Bilan and has been published by Springer Nature this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-11-13 with Business & Economics categories.
The traditional role of a bank was to transfer funds from savers to investors, engaging in maturity transformation, screening for borrower risk and monitoring for borrower effort in doing so. A typical loan contract was set up along six simple dimensions: the amount, the interest rate, the expected credit risk (determining both the probability of default for the loan and the expected loss given default), the required collateral, the currency, and the lending technology. However, the modern banking industry today has a broad scope, offering a range of sophisticated financial products, a wider geography -- including exposure to countries with various currencies, regulation and monetary policy regimes -- and an increased reliance on financial innovation and technology. These new bank business models have had repercussions on the loan contract. In particular, the main components and risks of a loan contract can now be hedged on the market, by means of interest rate swaps, foreign exchange transactions, credit default swaps and securitization. Securitized loans can often be pledged as collateral, thus facilitating new lending. And the lending technology is evolving from one-to-one meetings between a loan officer and a borrower, at a bank branch, towards potentially disruptive technologies such as peer-to-peer lending, crowd funding or digital wallet services. This book studies the interaction between traditional and modern banking and the economic benefits and costs of this new financial ecosystem, by relying on recent empirical research in banking and finance and exploring the effects of increased financial sophistication on a particular dimension of the loan contract.
The Fair Value Of Insurance Business
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Author : Irwin T. Vanderhoof
language : en
Publisher: Springer Science & Business Media
Release Date : 2012-12-06
The Fair Value Of Insurance Business written by Irwin T. Vanderhoof and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-12-06 with Business & Economics categories.
Insurance companies, as well as banks and thrift institutions, have traditionally reported assets and liabilities on the basis of their amortized cost, or book value. But following the turmoil in securities markets due to highly volatile interest rate fluctuations in the 1980s and the early 1990s, and problems caused by inadequate liquidity, in the mid-1990s the Financial Accounting Standards Board (FASB) issued a new ruling calling for financial intermediaries to report the fair, or market, value of most assets. Called FAS 115, this new standard is the first step in the eventual change to valuing all the assets and liabilities belonging to financial intermediaries under the fair value accounting method. Thus, these changes will pose tremendous future implications for three key business measures of a financial intermediary: Solvency: if the fair values of assets and liabilities are out-of-step, then healthy companies may report negative net worth and insolvent companies may appear to be in sound financial condition. Reported Earnings: if the fair values of assets and liabilities are out of step, then reported earnings will not accurately represent the financial operations of the company. Risk Management: FASB recently postponed the implementation of its new rules on accounting for the use of derivatives instruments. However, if the final set of rules for figuring the fair value of derivatives is not carefully crafted, it may be possible that companies prudently hedging their risks are subject to penalties in their financial reports, while companies taking greater risks appear to have less volatile financial performance. Compared to banks and other financial intermediaries, life insurance companies have the longest term and most complex liabilities, and hence the new FASB requirement poses the most severe challenges to the life insurance industry. The lessons learned from the debate among life insurance academics and professionals about how respond to the fair value reporting rule will be instructive to their counterparts in other sectors of the insurance industry, as well as those involved with other financial institutions. Of particular note are the two papers which comprise Part III. The first provides examples of the fair valuing of annuity contracts, while the second offers examples of the fair valuing of term insurance products. As the papers collected in The Fair Value of Insurance Business extend and update some of the issues treated in a previous Salomon Center conference volume, The Fair Value of Insurance Liabilities, this new volume may be viewed as a companion to the earlier book.
The Pricing And Hedging Of Barrier Options And Their Applications In Finance And Life Insurance
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Author : Michael Suchanecki
language : de
Publisher:
Release Date : 2008
The Pricing And Hedging Of Barrier Options And Their Applications In Finance And Life Insurance written by Michael Suchanecki and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
Risk Neutral Valuation
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Author : Nicholas H. Bingham
language : en
Publisher:
Release Date : 1998
Risk Neutral Valuation written by Nicholas H. Bingham and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998 with Finance categories.
The Pricing And Hedging Of Barrier Options And Their Applications In Finance And Life Insurance
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Author : Michael Suchanecki
language : en
Publisher:
Release Date : 2008
The Pricing And Hedging Of Barrier Options And Their Applications In Finance And Life Insurance written by Michael Suchanecki and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
Property Derivatives
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Author : Juerg M. Syz
language : en
Publisher: Wiley
Release Date : 2008-12-08
Property Derivatives written by Juerg M. Syz and has been published by Wiley this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008-12-08 with Business & Economics categories.
Property derivatives have the potential to revolutionize real estate - the last major asset class without a liquid derivatives market. The new instruments offer ease and flexibility in the management of property risk and return. Property funds, insurance companies, pension and life funds, speculators, hedge funds or any asset manager with a view on the real estate market can apply the new derivatives to hedge property risk, to invest synthetically in real estate, or for portfolio optimization. Moreover, developers, builders, home suppliers, occupiers, banks, mortgage lenders and governmental agencies can better cope with their real estate exposure using property derivatives. This book is a practical introduction to property derivatives and their numerous applications. Providing a comprehensive overview of the property derivatives market and indices, there is also in-depth coverage of pricing, hedging and risk management, which will deepen the readers understanding of the market's mechanisms. Covering both the theoretical and practical aspects of the property derivatives markets; this book is the definitive reference guide to a new and fast-growing market.