Posted: 7 Feb 2011
Date Written: July 23, 2010
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
Suggested Citation: 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: https://ssrn.com/abstract=1754508 or http://dx.doi.org/10.2139/ssrn.1754508