Valuation and Hedging

This course aims to teach students the techniques of quantitative finance and apply them to insurance contracts. The underlying principle is that the market-consistent value of an (insurance) contract is based on the market value of a replicating portfolio plus an 'add-on' for the remaining (unhedgeable) risk.

 

Topics include:

  1. Market-consistent valuation and total balance sheet approach in regulation
  2. Pricing and hedging using derivatives, such as futures,  swaps and swaptions
  3. Stochastic calculus and option theory with applications to insurers (e.g. embedded unit linked options)
  4. Stochastic interest rate models and interest rate options with applications to insurers (e.g. embedded profit sharing options)
  5. Pricing of nonhedgeable risks (incomplete markets): using cost-of-capital method or actuarial pricing operators
  6. Simulation techniques: (least-squares) Monte-Carlo

 

Learning outcomes

  • Understanding the role of market-consistent valuation in managing the insurer's balance sheet and in regulation
  • Modelling of stochastic financial processes using analytical and numerical techniques 
  • Valuation and hedging (replicating portfolio) of liabilities including (embedded) options and garantuees 

 

Literature

  • Options, Futures and other Derivates, John C. Hull
  • Lecture notes to be distributed by lecturer

 

Software

R: you can download this program and the manuals (for installation and use of the program) for free via http://www.r-project.org/.

 

Exam

Written exam meeting 1, 2, 3 and 4.

 

Teacher

Dr. K.B. Gubbels