Post by congregatio on Nov 21, 2017 8:14:14 GMT 4
Natural Hedging with Fix and Floating Strike Guarantees
26 Pages Posted: 7 Nov 2017
Antje Brigitte Mahayni
Mercator School of Management
Oliver Lubos
Mercator School of Management
Katharina Stein
Mercator School of Management
Date Written: October 26, 2017
Abstract
The paper analyzes minimum return rate guarantees (MRRGs) including fixed guarantee rates prevailing for the whole contract horizon as well as floating guarantee rates which are linked to the interest rate evolution. In a complete arbitrage free market where the asset and bond price dynamics are given by Gaussian processes, we obtain closed form pricing solutions for both guarantee schemes. Differences in the guarantee costs are then explained by the difference of the arbitrage free values of the fix and floating rate guarantees and the difference between cumulated volatilities resulting from forward and simple volatilities. We then consider the perspective of the asset liability management, i.e. we analyze the sensitivities of the asset and liability side against changes in the interest rate. We show that a combination of fix price and floating strike guarantees enables a natural hedge against changes in the interest rate.
Hedging with Fix and Floating Strike Guaran....pdf (485.72 KB)
26 Pages Posted: 7 Nov 2017
Antje Brigitte Mahayni
Mercator School of Management
Oliver Lubos
Mercator School of Management
Katharina Stein
Mercator School of Management
Date Written: October 26, 2017
Abstract
The paper analyzes minimum return rate guarantees (MRRGs) including fixed guarantee rates prevailing for the whole contract horizon as well as floating guarantee rates which are linked to the interest rate evolution. In a complete arbitrage free market where the asset and bond price dynamics are given by Gaussian processes, we obtain closed form pricing solutions for both guarantee schemes. Differences in the guarantee costs are then explained by the difference of the arbitrage free values of the fix and floating rate guarantees and the difference between cumulated volatilities resulting from forward and simple volatilities. We then consider the perspective of the asset liability management, i.e. we analyze the sensitivities of the asset and liability side against changes in the interest rate. We show that a combination of fix price and floating strike guarantees enables a natural hedge against changes in the interest rate.
Hedging with Fix and Floating Strike Guaran....pdf (485.72 KB)