Semi-static hedging of variable annuities |
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| Institution: | 1. Department of Law, Accounting and Finance, Grenoble Ecole de Management, 12 Rue Pierre Semard, 38000 Grenoble, France;2. Department of Mathematics, Hankuk University of Foreign Studies, 81 Oedae-ro, Mohyeon-myeon, Cheoin-gu, Yongin-si, Gyeonggi-do, 449-791, Republic of Korea;1. Programa de Geriatría, Servicio de Medicina Interna, Hospital Universitari de Bellvitge, IDIBELL, L’Hospitalet de LLobregat, Barcelona, España;2. Servicio de Medicina Interna, Hospital Clínico Universitario Lozano Blesa, Facultad de Medicina, Instituto de Investigación Sanitaria de Aragón (IIS-Aragón), Zaragoza, España;1. Servicio de Urgencias, Hospital Universitario Puerta de Hierro-Majadahonda, Majadahonda, Madrid, España;2. Universidad Alfonso X El Sabio, Madrid, España;3. Servicio de Farmacia, Hospital Universitario Puerta de Hierro-Majadahonda, Majadahonda, Madrid, España;4. Servicio de Medicina Interna, Hospital Severo Ochoa de Leganés, Leganés, Madrid, España;1. Department of Economics, Dartmouth College, Hanover, NH 03755-3514, United States;2. NBER, United States;3. Department of Economics, Texas Tech University, Lubbock, TX 79409, United States;4. Department of Economics, Dartmouth College, Hanover, NH 03755-3514, United States |
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| Abstract: | This paper focuses on hedging financial risk in variable annuities with guarantees. We show that insurers should incorporate the specificity of the periodic payment of variable annuities fees to best hedge embedded guarantees and should focus on hedging the net liability. We develop a new hedging strategy based on semi-static hedging techniques, which takes into account the periodically collected fees, and confirm that it is more effective than delta-hedging with same rebalancing dates, as well as traditional semi-static hedging strategies that do not consider the specificity of the payments of fees in their optimization. It is also verified that short-selling or using put options as hedging instruments allows more effective hedging. |
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| Keywords: | Effective hedging Variable annuities Semi-static hedging Periodic fees Embedded guarantees |
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