6 research outputs found
Risico en Rendement in Balans voor Verzekeraars
Antoon Pelsser (1968) is Head of the Asset-Liability Matching department of
ING-Insurance. The ALM department advises the board on the optimal asset
allocation to cover the insurance liabilities. The department is also responsible
for the calculation of market values and risk measures of insurance contracts.
He also holds a part-time position as Professor of Mathematical Finance at the
Econometric Institute at the Erasmus University in Rotterdam. His research
interests focus on pricing models for interest rate derivatives, the pricing of
insurance contracts and Asset-Liability Management of insurance contracts. He has
published in several academic journals including Finance and Stochastics, Journal
of Derivatives, European Journal of Operational Research and European Finance
Review. He is also author of the book Efficient Methods for Valuing Interest Rate
Derivatives, published by Springer Verlag.In this inaugural address Professor Pelsser investigates how one can strike a balance between investmens with a high expected return and high risk (e.g. stocks) versus low-risk investments with a low return (e.g.bonds). Using an example of a life-insurance company he shows in this
address how one can employ optimisation-techniques to make a trade-off between the desire to find an investment return as high as possible under the constraint that the insurance company should be able to meet its obligations to the policyholders under all economic circumstances
Pricing and Hedging Guaranteed Annuity Options via Static Option Replication
In this paper we derive a market value for Guaranteed Annuity Option using martingale modeling techniques. Furthermore, we show how to construct a static replicating portfolio of vanilla interest rate swaptions that replicates the Guaranteed Annuity Option. Finally, we illustrate with historical UK interest rate data from the period 1980 until 2000 that the static replicating portfolio is extremely effective as a hedge against the interest rate risk involved in the GAO, that the static replicating portfolio is considerably cheaper than up-front reserving and also that the replicating portfolio provides a much better level of protection than an up-front reserve
A Comparison of Single Factor Markov-Functional and Multi Factor Market Models
We compare single factor Markov-functional and multi factor market models for hedging performance of Bermudan swaptions. We show that hedging performance of both models is comparable, thereby supporting the claim that Bermudan swaptions can be adequately riskmanaged
with single factor models. Moreover, we show that the impact of smile can be much larger than the impact of correlation. We propose a new method for calculating risk sensitivities
of callable products in market models, which is a modification of the least-squares Monte Carlo
method. The hedge results show that this new method enables proper functioning of market
models as risk-management tools
Level-Slope-Curvature - Fact or Artefact?
The first three factors resulting from a principal components analysis of term structure data are in the literature typically interpreted as driving the level, slope and curvature of the term structure. Using slight generalisations of theorems from total positivity, we present sufficient conditions under which level, slope and curvature are present. These conditions have the nice interpretation of restricting the level, slope and curvature of the correlation surface. It is proven that the Schoenmakers-Coffey correlation matrix also brings along such factors. Finally, we formulate and corroborate our conjecture that the order present in correlation matrices causes slope
Risk managing bermudan swaptions in the libor BGM model
This article presents a novel approach for calculating swap vega
per bucket in the Libor BGM model. We show that for some forms of the
volatility an approach based on re-calibration may lead to a large uncertainty
in estimated swap vega, as the instantaneous volatility structure may
be distorted by re-calibration. This does not happen in the case of constant
swap rate volatility. We then derive an alternative approach, not based on
re-calibration, by comparison with the swap market model. The strength of
the method is that it accurately estimates vegas for any volatility function
and at a low number of simulation paths. The key to the method is that
the perturbation in the Libor volatility is distributed in a clear, stable and
well understood fashion, whereas in the re-calibration method the change in
volatility is hidden and potentially unstable
Pricing Double Barrier Options: An Analytical Approach
Double barrier options have become popular instruments in derivative markets. Several papers have already analysed double knock-out call and put options using different methods. In a recent paper, Geman and Yor (1996) derive expressions for the Laplace transform of the double barrrier option price. However, they have to resort to numerical inversion of the Laplace transform to obtain option prices. In this paper, we are able to solve, using contour integration, the inverse of the Laplace transforms analytically thereby eliminating the need for numerical inversion routines. To our knowledge, this is one of the first applications of contour integration to option pricing problems. To illustrate the power of this method, we derive analytical valuation formulas for a much wider variety of double barrier options than has been treated in the literature so far. Many of these variants are nowadays being traded in the markets. Especially, options which pay a fixed amount of money (a "rebate") as soon as one of the barriers is hit and double barrier knock-in options