Natural Delta Gamma Hedging of Longevity and Interest Rate Risk. ICER Working Paper

Luciano, Elisa and Regis, Luca and Vigna, Elena Natural Delta Gamma Hedging of Longevity and Interest Rate Risk. ICER Working Paper. Working Paper #21/2011

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Abstract

The paper presents closed-form Delta and Gamma hedges for annuities and death assurances, in the presence of both longevity and interest-rate risk. Longevity risk is modeled through an extension of the classical Gompertz law, while interest rate risk is modeled via an Hull-and-White process. We theoretically provide natural hedging strategies, considering also contracts written on different generations. We provide a UK-population and bond-market calibrated example. We compute longevity exposures and explicitly calculate Delta-Gamma hedges. Re-insurance is needed in order to set-up portfolios which are Delta-Gamma neutral to both longevity and interest-rate risk.

Item Type: Working Paper (Working Paper) H Social Sciences > HB Economic Theory Economics and Institutional Change Ms T. Iannizzi 27 Sep 2013 11:46 27 Sep 2013 11:46 http://eprints.imtlucca.it/id/eprint/1801