Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257841 
Year of Publication: 
2019
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 7 [Issue:] 1 [Article No.:] 2 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-25
Publisher: 
MDPI, Basel
Abstract: 
This paper assesses the hedge effectiveness of an index-based longevity swap and a longevity cap for a life annuity portfolio. Although longevity swaps are a natural instrument for hedging longevity risk, derivatives with non-linear pay-offs, such as longevity caps, provide more effective downside protection. A tractable stochastic mortality model with age dependent drift and volatility is developed and analytical formulae for prices of longevity derivatives are derived. The model is calibrated using Australian mortality data. The hedging of the life annuity portfolio is comprehensively assessed for a range of assumptions for the longevity risk premium, the term to maturity of the hedging instruments, as well as the size of the underlying annuity portfolio. The results compare the risk management benefits and costs of longevity derivatives with linear and nonlinear payoff structures.
Subjects: 
longevity risk management
longevity swaps
longevity options
hedge effectiveness
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
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