A basis point

(Jun 7, 2011)

In an earlier post I mentioned the advent of survivor forwards, or S-forwards, a derivative contract which could be used for hedging pension liabilities.  Survivor forwards appeared again in another post illustrating the financial impact of model risk.

A survivor forward defined on an index of, say, population mortality will give a large data set with considerable history on which to base a projection model.  However, a natural question is to ask how suitable such a contract would be for hedging pension or annuitant liabilities?  Figure 1 shows the Kaplan-Meier survival curve from age 70 for male annuitants born in 1928, together with the corresponding survival curve for males in England & Wales.


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Tags: survivor forward, S-forward, hedging, basis risk

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