Description: Reviews basic desirable features in an economic scenario generator. Discusses basics of model structure and validation process

Description: This article explores the effectiveness of hedging delta and rho of equity options. This provides insight into the frequency and severity of losses due to not hedging volatility risk or other higher order risks. 10yr-equity put option strategies were chosen to represent the risk of hedging guaranteed benefits attached to variable annuities, while 1-yr put and call strategies were modeled to investigate the risk of hedging equity index interest credited to fixed indexed annuities. In both cases, the value of the option was compared to the value of delta/rho hedges in the tail of both actual historical and simulated scenarios for equity returns and volatilities. The historical path of interest rates and equities was generally used to highlight the hedge impact for different implied volatility assumptions in each example.

Description: Proposes alternatives for estimating the long term interest returns in Indexed Universal Life products. Defends expected return of 20%-45% on hedge budgets.

Description: Recaps the evolution of VA products and hedging programs. Reflects on strategic considerations that contributed to relative performance in this market.

Description: Derives appropriate hedge ratios for CPPI strategies, taking into account discrete hedge times and market dislocations (gap risk).

Description: The author uses a generalized asset risk model to explore C1 risk, drawing heavily from investment theory and pension fund management, applying these to an insurance general account. This article has two parts the first part, contained in this issue of Risk and Reward, describes the basic C1 model itself. The second part, which will be published in the next issue of Risks and Rewards, discusses various implications of the basic C1 model, especially related to managing the company’s investment portfolio.

Description: This article shows a different form of the Black-Scholes formula for European calls and puts under risk-neutral assumptions, that permits a comfortable verbal interpretation. The derivation of this alternative form appears at the end of the article.

Description: “It’s interesting to note that, given the past year’s reversal of fortunes in the stock markets, all the media rap about heated inquiries around back-dating options has stopped.”

Description: Explains the method used to calculate Liquidity Cost Score and Price Impact Score. Describes the rationale for and applications of these methods.

Description: The article discusses that drawbacks of the HJM Heath-Jarrow-Morton class of stochastic interest models and suggests the use of the Longstaff-Schwartz string model. It describes the use and benefits of the Lonstaff-Schwartz string model.