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
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
Date posted: February 7, 2011
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