Survivor Derivatives: A Consistent Pricing Framework

18 Pages Posted: 4 Aug 2010

See all articles by Paul Dawson

Paul Dawson

Kent State University

Kevin Dowd

City University London - Sir John Cass Business School

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

David P. Blake

City, University of London

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Abstract

Survivorship risk is a significant factor in the provision of retirement income. Survivor derivatives are in their early stages and offer potentially significant welfare benefits to society. This article applies the approach developed by Dowd et al. (2006), Olivier and Jeffery (2004), Smith (2005), and Cairns (2007) to derive a consistent framework for pricing a wide range 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 nonlinear survivor derivatives, 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., Survivor Derivatives: A Consistent Pricing Framework. Journal of Risk and Insurance, Vol. 77, Issue 3, pp. 579-596, September 2010, Available at SSRN: https://ssrn.com/abstract=1653048 or http://dx.doi.org/10.1111/j.1539-6975.2010.01356.x

Paul Dawson

Kent State University ( email )

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

Kevin Dowd

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Andrew J. G. Cairns

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

Edinburgh, Scotland EH14 4AS
United Kingdom

David P. Blake

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)

HOME PAGE: http://www.pensions-institute.org/

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