How Derivatives Can Help Solve the Pension Fund Crisis

27 Pages Posted: 4 Aug 2003

See all articles by Harry M. Kat

Harry M. Kat

Independent

Theo P. Kocken

Cardano Risk Management

Huub F. van Capelleveen

Cardano Risk Management

Date Written: June 25, 2003

Abstract

In this paper we use a scenario-based ALM model to study the effects on the risk-return profile of defined benefit pension funds from including options in the pension fund portfolio. Our results show that properly constructed option strategies can add substantial value to pension fund management. The results are robust with respect to variations in horizon, equity risk premium and volatility assumptions. The optimal strategy, however, should be determined in an asset-liability context and not ad hoc, as the intuitively most appealing strategies are not necessarily the most effective. In addition, we find that different types of funds may require significantly different option strategies. What works well for one fund may be less effective or even counter-productive for another. Overall, incorporating options appears an efficient way of improving long-term pension fund health and therefore the sustainability of defined benefit pension schemes.

Keywords: Pension fund, derivatives, options, asset-liability management, scenarios

JEL Classification: G23

Suggested Citation

Kat, Harry M. and Kocken, Theo P. and van Capelleveen, Huub F., How Derivatives Can Help Solve the Pension Fund Crisis (June 25, 2003). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=420023 or http://dx.doi.org/10.2139/ssrn.420023

Harry M. Kat (Contact Author)

Independent

No Address Available

Theo P. Kocken

Cardano Risk Management ( email )

Beurs World Trade Centre, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

Huub F. Van Capelleveen

Cardano Risk Management ( email )

Beurs World Trade Center, 11th Floor
Beursplein 37
Rotterdam 3011 AA
Netherlands
+31-10-2434747 (Phone)
+31-10-4660907 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,929
Abstract Views
6,143
rank
7,590
PlumX Metrics