Completing the Survivor Derivatives Market: A General Pricing Framework

Pensions Institute Discussion Paper No. PI-0712

34 Pages Posted: 10 Feb 2009

See all articles by Paul Dawson

Paul Dawson

Kent State University

Kevin Dowd

Nottingham University Business School (NUBS)

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

David P. Blake

City, University of London

Date Written: February 10, 2009

Abstract

Survivorship is a risk of considerable importance to developed economies. Survivor derivatives are in their early stages and manage a risk which is arguably more serious than that managed by credit derivatives. This paper takes the approach developed by Dowd et al. [2006], Olivier and Jeffery [2004], Smith [2005] and Cairns [2007] for pricing survivor swaps and shows its application to the pricing of other forms of linear survivor derivatives, such as forwards, basis swaps, forward swaps and futures. It then shows how a recent option pricing model set out by Dawson et al. [2009] can be used to price survivor options such as survivor swaptions, caps, floors and combined option products. It concludes by considering applications of these products to a pension fund that wishes to hedge its survivorship risks.

Suggested Citation

Dawson, Paul and Dowd, Kevin and Cairns, Andrew J. G. and Blake, David P., Completing the Survivor Derivatives Market: A General Pricing Framework (February 10, 2009). Pensions Institute Discussion Paper No. PI-0712, Available at SSRN: https://ssrn.com/abstract=1340359 or http://dx.doi.org/10.2139/ssrn.1340359

Paul Dawson

Kent State University ( email )

Kent, OH 44242
United States
330-672-1242 (Phone)

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

David P. Blake (Contact Author)

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

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