Article ID Journal Published Year Pages File Type
5076246 Insurance: Mathematics and Economics 2016 9 Pages PDF
Abstract

Complex insurance risks typically have multiple exposures. If available, options on multiple underliers with a short maturity can be employed to hedge this exposure. More precisely, the present value of aggregate payouts is hedged using least squares, ask price minimization, and ask price minimization constrained to long only option positions. The proposed hedges are illustrated for hypothetical Variable Annuity contracts invested in the nine sector ETF's of the US economy. We simulate the insurance accounts by simulating risk-neutrally the underliers by writing them as transformed correlated normals; the physical and risk-neutral evolution is taken in the variance gamma class as a simple example of a non-Gaussian limit law. The hedges arising from ask price minimization constrained to long only option positions delivers a least cost and most stable result.

Related Topics
Physical Sciences and Engineering Mathematics Statistics and Probability
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