Ragnar Norberg
Institut de Science Financiere et d'Assurances (ISFA), Universite Lyon 1
An actuarial perspective on hedging
Abstract:
An investment strategy consists of a process of portfolio weights (defined
as usual) and a cost process representing deposits into and withdrawals
from the portfolio. The investment strategy is a hedge of a contractual
payment stream
(e.g. defined by an insurance contract) if the payments are currently
deposited on or withdrawn from the portfolio as they are due. The purpose
of the hedge is stated as a optimization criterion for the investment
strategy. Certain quadratic loss criteria lead to the same optimal
portfolio weights but different optimal cost functions, special cases
being
meanvariance hedging and risk minimization. An attempt is made to
incorporate Solvency II in the setup. So far the theory dealt with
optimal hedging with a given set of available traded assets. We finish by
discussing the design of the very assets (viz. insurance derivatives), the
purpose being to minimize the average hedging error across a population of
hedgers pursuing optimal individual hedging strategies.
