An Intergenerational Cross-Country Swap

Miret Padovani and Paolo Vanini
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Miret Padovani: Zurich Cantonal Bank

No 09-17, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper addresses the issue of intergenerational and international sharing of longevity and growth risks. Current research on worldwide demographic changes highlights the importance of longevity risk on financial markets and the need to devise optimal hedging vehicles. We present a potential financial innovation between two countries at different stages of economic development and with different long-term challenges. This 30-year-long swap is structured in such a way to capture the di erent timing of needed funds of the two countries and the funding capabilities of each generation: the more developed economy requires funds in the future to cover expenses for its ageing population, while the developing economy needs funds today to pay for educational, technological, and other infrastructural services. To price the swap, we apply an exponential-utility-based pricing method and define an interval of prices allowing a contract to be agreed upon. We show how the bid-ask spread varies with respect to the governments' risk and time preferences.

Pages: 35 pages
Date: 2009-05
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0917

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