Description: This is the second part of a 2 part series on Real options analysis (ROA). This article looks into the limitations of using financial option theory when doing real options analysis with projects that are long-dated and uncertain, such as: 1. First-degree homogeneity, 2. Uncertainty must derive from Brownian motion, and 3. Risk neutrality.

Description: The article introduces a cashflow matching strategic asset allocation (SAA) framework for life insurers. Given the recent shift to higher interest rates after two decades of persistent low interest rates, insurers have an opportunity to enhance their asset liability management by rebalancing asset portfolios to narrow duration gaps and attain higher risk-adjusted yields. The framework aims to align investment objectives with economic, regulatory, and rating agency requirements. It prioritizes cashflow matching as the primary optimization goal and incorporates security-level asset information to assist portfolio managers in executing SAA seamlessly. The article highlights the benefits of the cashflow matching SAA framework, including greater attention to cashflow matching, unbiased results, readily executable strategies, and stable economic reserves. A case study is included to demonstrate the effectiveness of the framework in improving risk-adjusted return and cashflow matching for a representative liability block.

Description: The paper demonstrates that the most popular rationalization for evolving glide paths is flawed and should be discarded. The paper also demonstrates that glide paths should generally evolve for investors that endeavor to optimize outcomes and reevaluate their portfolios regularly.