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Funding Ratio Options

Posted: 7 Feb 2011  

Agnes S. Joseph

University of Amsterdam - Department of Quantitative Economics (KE); Eureko/Achmea

Dirk A. de Jong

affiliation not provided to SSRN

Antoon Pelsser

Maastricht University; Netspar

Date Written: July 23, 2010

Abstract

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

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

Agnes S. Joseph (Contact Author)

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Eureko/Achmea ( email )

Zeist
Netherlands

Dirk A. De Jong

affiliation not provided to SSRN ( email )

Antoon A. J. Pelsser

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://https://sites.google.com/site/apelsseraca/

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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