Funding Ratio Options

Agnes S. Joseph

University of Amsterdam - Department of Quantitative Economics (KE); Eureko/Achmea

Dirk A. de Jong

affiliation not provided to SSRN

Antoon Pelsser

Maastricht University; Netspar

July 23, 2010

Netspar Discussion Paper No. 07/2010-083

This paper defines an approximation to the value of funding ratio put options for pension funds. This option is, by construction, the ideal option to hedge the risk of a funding ratio falling below some required minimum level. It’s value can be used for several applications, for example as a risk measure for internal risk management or regulation, as a benchmark for (other) derivative solutions to hedge insolvency risks, or to value guarantees made by sponsors to eliminate a funding shortfall. A numerical example shows that the impact of the presence of mortality volatility risk on the value of funding ratio put options is significant.

Keywords: pension fund, funding ratio, insolvency risk, regulation

JEL Classification: G23, G24, G28

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Date posted: February 7, 2011  

Suggested Citation

Joseph, Agnes S. and de Jong, Dirk A. and Pelsser, Antoon, Funding Ratio Options (July 23, 2010). Netspar Discussion Paper No. 07/2010-083. Available at SSRN: http://ssrn.com/abstract=1754508 or http://dx.doi.org/10.2139/ssrn.1754508

Contact Information

Agnes S. Joseph (Contact Author)
University of Amsterdam - Department of Quantitative Economics (KE) ( email )
Roetersstraat 11
Amsterdam, 1018 WB
Eureko/Achmea ( email )
Dirk A. De Jong
affiliation not provided to SSRN ( email )
Antoon A. J. Pelsser
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200 MD
HOME PAGE: http://https://sites.google.com/site/apelsseraca/
Netspar ( email )
P.O. Box 90153
Tilburg, 5000 LE
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