De Actuaris: Hedging Complex Cross-Gamma Exposures: An Elegant Vanilla Alternative
Thema: beleggingen
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Over the last decennia many insurance companies have sold insurance contracts, either in the pension or retail markets, with embedded guarantees on the performance of markets and/or investment funds. More and more insurance companies will report P&L on these books using Market Consistent valuation assumptions. Hedge programs are initiated to reduce P&L volatility. As a first

step linear hedges, using e.g. futures and forward contracts, are often considered to eliminate the directional exposure towards market movements. More advanced hedge programs will include vanilla options to (partly) protect against bigger market returns and/or higher return volatility of single asset classes, i.e. so-called gamma/convexity matching, and to hedge for movements in

market implied volatilities affecting the (Market Consistent) reserves of the embedded options in the insurance contracts. The investments underlying the guarantees often contain exposures in multiple equity indices, exchange rates and potentially bond funds. Insurance companies are therefore exposed to simultaneous movements across the different markets. The option risk is

multivariate, rather than univariate in nature. In this article we will discuss an elegant approach to hedge these so-called cross-gamma exposures using vanilla option hedge strategies.

Publicatiedatum:25 september 2014
Auteur:Ruitenburg, W. van (Willem); Schrager, D.F. (David)
Gepubliceerd in:Uitgave 22-1
Document: 22-1-art.vRuitenberg Schrager.pdf (220,18 KB)
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