Efficient Greek Calculation of Variable Annuity Portfolios for Dynamic Hedging: A Two-Level Metamodeling Approach

Guojun Gan and X. Sheldon Lin

North American Actuarial Journal, 2017, vol. 21, issue 2, 161-177

Abstract: The financial risk associated with the guarantees embedded in variable annuities cannot be addressed adequately by traditional actuarial techniques. Dynamical hedging is used in practice to mitigate the financial risk arising from variable annuities. However, a major challenge of dynamical hedging is to calculate the dollar Deltas of a portfolio of variable annuities within a short time interval so that rebalancing can be done on a timely basis. In this article, we propose a two-level metamodeling approach to efficiently estimating the partial dollar Deltas of a portfolio of variable annuities under a multiasset framework. The first-level metamodel is used to estimate the partial dollar Deltas at some well-chosen market levels, and the second-level metamodel is used to estimate the partial dollar Deltas at the current market level based on the precalculated partial dollar Deltas. Our numerical results show that the proposed approach performs well in terms of accuracy and speed.

Date: 2017
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DOI: 10.1080/10920277.2016.1245623

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