Contingent Claims Analysis and Life-Cycle Finance

12 Pages Posted: 27 Dec 2007 Last revised: 16 Nov 2008

See all articles by Zvi Bodie

Zvi Bodie

Boston University

Doriana Ruffino

Board of Governors of the Federal Reserve System

Jonathan Treussard

Research Affiliates

Date Written: March 24, 2008


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.

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

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

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: or

Zvi Bodie (Contact Author)

Boston University ( email )

12 Salisbury Road
Brookline, MA
United States
617 306 5556 (Phone)


Doriana Ruffino

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jonathan Treussard

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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