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http://ssrn.com/abstract=1078864
 
 

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Contingent Claims Analysis and Life-Cycle Finance


Zvi Bodie


Boston University - Department of Finance & Economics

Doriana Ruffino


Government of the United States of America - Division of Research and Statistics

Jonathan Treussard


Ziff Brothers Investments - Risk Management

March 24, 2008

MIT Sloan Research Paper No. 4676-08

Abstract:     
This paper explores the application of contingent claims analysis (CCA) to two "hot" issues in life-cycle finance: (1) investing for retirement and (2) deciding when, if ever, to switch careers. Participants in individual retirement accounts do not have the time or the knowledge to make their own investment decisions. Today they are defaulted into life-cycle mutual funds that pass all risk directly through to the participant. We use CCA to demonstrate how financial firms can design and produce guaranteed contingent benefit contracts that improve participant welfare at no additional cost to the system. In exploring the career-choice issue in the second part of the paper, we use CCA in a somewhat different way. The decision to switch careers is analogous to deciding when to exercise an American-style option to swap one asset for another. By applying the methods used to analyze the option-exercise decision to the career-switching problem, we gain some new insights beyond those derived from the traditional dynamic programming approaches.

Number of Pages in PDF File: 12

Keywords: contingent claims analysis, life-cycle finance, retirement saving plans

JEL Classification: G11, G13, G22, G23, C61, D11, D81, D91

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Date posted: December 27, 2007 ; Last revised: November 16, 2008

Suggested Citation

Bodie, Zvi and Ruffino, Doriana and Treussard, Jonathan, Contingent Claims Analysis and Life-Cycle Finance (March 24, 2008). MIT Sloan Research Paper No. 4676-08. Available at SSRN: http://ssrn.com/abstract=1078864 or http://dx.doi.org/10.2139/ssrn.1078864

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Doriana Ruffino
Government of the United States of America - Division of Research and Statistics ( email )
20th and C Streets, NW
Washington, DC 20551
United States
Jonathan Treussard
Ziff Brothers Investments - Risk Management ( email )
New York, NY
United States
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