Modelling the fair value of annuities contracts: the impact of interest rate risk and mortality risk

The purpose of this paper is to analyze the problem of the fair valuation of annuities contracts. The market consistent valuation of these products requires a pricing framework which includes the two main sources of risk affecting the value of the annuity, i.e. interest rate risk and mortality risk. As the IASB has not set any specific guidelines as to which models are the most appropriate for these risks, in this note we consider a range of different models calibrated with historical data. We calculate the fair value of the annuity as a portfolio of zero coupon bonds, each with maturity set equal to the date of the annuity payments; the weights in the portfolio are given by the survival probabilities. Moreover, we focus on the additional information provided by stochastic simulations in order to define a suitable risk margin. The nature of the risk margin is one of the main key issues concerning the IASB and Solvency project

Computation-Communication Trade-offs and Sensor Selection in Real-time Estimation for Processing Networks

Recent advances in electronics are enabling substantial processing to be performed at each node (robots, sensors) of a networked system. Local processing enables data compression and may mitigate measurement noise, but it is still slower compared to a central computer (it entails a larger computational delay). However, while nodes can process the data in parallel, the centralized computational is sequential in nature. On the other hand, if a node sends raw data to a central computer for processing, it incurs communication delay. This leads to a fundamental communication-computation trade-off, where each node has to decide on the optimal amount of preprocessing in order to maximize the network performance. We consider a network in charge of estimating the state of a dynamical system and provide three contributions. First, we provide a rigorous problem formulation for optimal real-time estimation in processing networks in the presence of delays. Second, we show that, in the case of a homogeneous network (where all sensors have the same computation) that monitors a continuous-time scalar linear system, the optimal amount of local preprocessing maximizing the network estimation performance can be computed analytically. Third, we consider the realistic case of a heterogeneous network monitoring a discrete-time multi-variate linear system and provide algorithms to decide on suitable preprocessing at each node, and to select a sensor subset when computational constraints make using all sensors suboptimal. Numerical simulations show that selecting the sensors is crucial. Moreover, we show that if the nodes apply the preprocessing policy suggested by our algorithms, they can largely improve the network estimation performance.Comment: 15 pages, 16 figures. Accepted journal versio

Public speaking and presentations a critical review: The caring speaker

Aims. It is assumed that the vast majority of the presentations we attend in our daily work leave much to be desired, due to the lack of a structural, methodological and professional approach. This thesis examines whether it is possible to improve individual performances in public speaking through a gradual, incremental, self-training approach. Methods. Over 100 sources (articles, books, papers, websites, video and audio material) have been reviewed to establish best practice in public speaking. A qualitative insight into how professionals (non-professional speakers) approach public speaking has been conducted. Finally a practical approach and tools for the improvement of nonprofessional speakers skills have been developed. Findings. Overall, the literature on public speaking fails to make the link between oratory performances and the personality and the context in which non-professional speakers operate. Objectives and salaries of non-professional speakers are rarely linked to their proficiency at the podium, with consequently very little time and opportunity for training or even preparation. Conclusion. Merging the good practice that emerge from the review of the literature, with the experience from the interviews with non-professional speakers, may have allowed us to find a practical approach to turn non-professional speaker into caring speakers.Objectivos. Supõe-se que a vasta maioria das apresentações públicas que presenciamos diariamente nos nossos contextos laborais não são totalmente satisfatórias, devido à falta de uma visão estruturante, metodológica e profissional. Esta tese procura aferir se é possível melhorar os desempenhos individuais em discursos em público utilizando uma perspectiva de auto-aprendizagem gradual e progressiva. Métodos. Mais de 100 fontes (artigos, livros, páginas Web, vídeos e material áudio) foram revistas para estabelecer as “boas práticas” de discursos em público. Foi conduzida uma análise qualitativa focalizando em como oradores não profissionais perspectivam discursos em público. Finalmente foram desenvolvidas ferramentas e uma perspectiva prática para uma melhoria do desempenho de oradores não profissionais. Resultados. Em geral, a literatura falha ao não encontrar a ligação entre a capacidade oratória em discursos em público e a personalidade e o contexto nos quais os oradores não profissionais estão inseridos. Raramente os objectivos e os salários de tais oradores estão relacionados com a sua performance, que reflectem consequentemente o pouco tempo e oportunidade para treino e preparação. Conclusão. Conseguindo combinar as “boas práticas” que emergem da revisão da literatura, com a experiência das entrevistas realizadas com oradores não profissionais, possibilitou-nos encontrar uma perspectiva prática para tornar oradores não profissionais em oradores empenhados

A Levy process-based framework for the fair valuation of participating life insurance contracts

In this communication, we develop suitable valuation techniques for a with-profit/unitized with profit life insurance policy providing interest rate guarantees, when a jump-diffusion process for the evolution of the underlying reference portfolio is used. Particular attention is given to the mispricing generated by the misspecification of a jump-diffusion process for the underlying asset as a pure diffusion process, and to which extent this mispricing affects the profitability and the solvency of the life insurance company issuing these contracts

Counterparty credit risk in a multivariate structural model with jumps

We present a multivariate version of a structural default model with jumps and use it in order to quantify the bilateral credit value adjustment and the bilateral debt value adjustment for equity contracts, such as forwards, in a Merton-type default setting. In particular, we explore the impact of changing correlation between names on these adjustments and study the effect of wrong-way and right-way risk

A Gentle Introduction to Value at Risk

This paper is an introduction to the measurement of market risk in financial markets, with examples drawn mainly from commodity markets. In particular, we present the concept of VaR, its limits, the problems related to its estimation and backtesting. This is done at single asset and at portfolio level. Issues related to estimation error, measurement of portfolio risk contribution and how to cope with derivative positions are also considered. Other important issues like liquidity, operational and credit risk will not be dealt here. For a Gentle introduction to the measurement of counterparty credit risk see the companion paper by Ballotta, Fusai and Marena always available on the SSRN web site

Investment Strategies and Risk Management for Participating Life Insurance Contracts

This paper proposes an asset allocation strategy for the risk management of the broad category of participating life insurance policies. The nature of the liability implied by these contracts allows us to treat them as options written on the reference portfolio backing the policy; consequently, the valuation approach is based on classical contingent claim theory. This leads to the identification of additional safety loadings against the risk of default implied by these contracts, and the setting up of suitable investment strategies aimed at minimizing this risk. The impact on the solvency requirements for the capital of the insurer of the proposed asset allocation strategy is analyzed by means of Monte Carlo techniques. Stress testing is considered as well with respect to the key risk factors of the model, such as the equity volatility and the market interest rate. The numerical analysis shows that, for the specific policy design considered in this paper, a suitable choice of the participation rate combined with the proposed investment strategy minimizes the overall default risk of the insurance company, both in terms of probability of default and expected severi