Natural delta gamma hedging of longevity and interest rate risk

Elisa Luciano, Luca Regis () and Elena Vigna ()

ICER Working Papers - Applied Mathematics Series from ICER - International Centre for Economic Research

Abstract: The paper presents closed-form Delta and Gamma hedges for an- nuities and death assurances, in the presence of both longevity and interest-rate risk. Longevity risk is modelled through an extension of the classical Gompertz law, while interest rate risk is modelled via an Hull-and-White process. We theoretically provide natural hedg- ing strategies, considering also contracts written on di erent genera- tions. We provide a UK-population and bond-market calibrated exam- ple. 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.

Pages: 19 pages
Date: 2012-01
New Economics Papers: this item is included in nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpmath:21-2011

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