Melnikov, Alexander and Skornyakova, Victoria (2005) Efficient Hedging Methodology Applied to Equity-Linked Life Insurance. Technical Report. Concordia University. Department of Mathematics & Statistics, Montreal, Quebec.
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In this paper we study efficient hedging and its applications to the pricing of equitylinked life insurance contracts. We devote our attention to the pure endowment contracts with a flexible guarantee. In our setting, these insurance instruments are based on two risky assets of the market controlled by the Black-Scholes model during the contract period. The first asset is responsible for the maximal size of future profit while the second provides a flexible guarantee for the insured.
The insurance company is considered as a hedger of a maximum of two risky assets as a contingent claim in this market. The contract is exercised if the insured is still alive at the maturity time and cannot be perfectly hedged in view of a positive survival probability of a client. To provide an appropriate risk-management in connection of such a contract, the company should exploit some imperfect hedging forms. Here we propose the use of efficient hedging with a power loss function.
Specifying developments in this area, we create the pricing methodology for the insurance contracts under consideration in terms of a generalized Margrabe’s formula.
The results are illustrated by a numerical actuarial analysis with the indices Russell 2000
and Dow Jones Industrial Average.
|Divisions:||Concordia University > Faculty of Arts and Science > Mathematics and Statistics|
|Item Type:||Monograph (Technical Report)|
|Authors:||Melnikov, Alexander and Skornyakova, Victoria|
|Series Name:||Department of Mathematics & Statistics. Technical Report No. 1/05|
|Corporate Authors:||Concordia University. Department of Mathematics & Statistics|
|Keywords:||equity-linked life insurance, efficient hedging, flexible guarantee, pure endowment, Margrabe’s formula.|
|Deposited By:||DIANE MICHAUD|
|Deposited On:||02 Jun 2010 12:31|
|Last Modified:||08 Dec 2010 18:23|
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