Description: This paper develops an option pricing model that takes cost of capital concepts as its foundation rather than dynamic replication. The resulting model, called the 'C' measure in this paper, is related to the family of Affine Jump Diffusion models that are well known in the finance literature, so it is fairly easy to understand and implement. We argue that this is a reasonable model to use for estimating equity implied volatilities that are beyond the five- to 10-year horizon that can typically be observed in today‘s capital markets. The paper concludes with a short discussion of how to grade from observable market data to the 'C' measure.

Description: This paper is to some extent a sequel to my previous paper A Bond Manager's Method for ALM published in Actuarial Research Clearing House Volume 1993.3. It borrows from that paper the concept of benchmark weights for measuring the sensitivity of the present value of a set of cash flows to changes in interest rates. However, a completely different approach to calculating benchmark weights is presented.

Description: From a session at the 2001 Valuation Actuary Symposium, held in Lake Buena Vista, Florida, November 29-30, 2001 Teaching session covering the development of realistic liability models for use in asset adequacy analysis, asset/liability management, pricing/repricing, financial reporting or other corporate purposes. The primary focus is modeling issues for variable product features, such as minimum living or death benefit guarantees on both variable life and annuities, annuity death benefit enhancements, and variable immediate annuities. Topics include: • Analysis of the special risks posed by these products • Selecting realistic dynamic assumptions • Techniques used in modeling these products • Scenario testing and result presentation to best communicate risks

Description: Regularization, by means of trading restrictions, is an effective way to obtain sparse replicating portfolios. By including only the most relevant replicating instruments, the resulting portfolio is more efficient computationally, easier to interpret, and better able to approximate the liability on an out-of-sample basis. The instruments selected depend largely on their respective trading costs. This paper evaluates a number of alternative methods for specifying trading costs. We find that trading costs based on simple statistics of the instrument and liability cash flows are an effective choice in practice. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: Risk management theory prescribes a few legitimate reasons for management to hedge corporate revenues and reduce income volatility. In this paper we will use the oil tanker industry to illustrate some of these strategic considerations and how management can account for them in their decisions regarding whether and how much to hedge. Further work is needed to incorporate these considerations into a broader theoretical framework. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.