Optimal Cross Hedging of Insurance Derivatives

DOI10.1080/07362990802128230MaRDI QIDQ3518300zbMATH OpenOpenAlexFDO

Authors Stefan Ankirchner, P. Imkeller, Alexandre Popier

Publication date 7 August 2008

Published in Stochastic Analysis and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0705.3760

zbMATH Keywords

admissibilityclimate riskcross hedgingdynamic hedgingentropic risk measureindifference priceinsurance derivativenegatively correlated exposureoptimal investment strategyweather derivativeweather risk

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Environmental economics (natural resource models, harvesting, pollution, etc.) (91B76) Optimal stochastic control (93E20)

Abstract: We consider insurance derivatives depending on an external physical risk process, for example a temperature in a low dimensional climate model. We assume that this process is correlated with a tradable financial asset. We derive optimal strategies for exponential utility from terminal wealth, determine the indifference prices of the derivatives, and interpret them in terms of diversification pressure. Moreover we check the optimal investment strategies for standard admissibility criteria. Finally we compare the static risk connected with an insurance derivative to the reduced risk due to a dynamic investment into the correlated asset. We show that dynamic hedging reduces the risk aversion in terms of entropic risk measures by a factor related to the correlation.

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Cites work

• A stochastic model of IndoPacific sea surface temperature anomalies
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Cited in

(11)

• Derivatives trading for insurers
• Hedging global environment risks: an option based portfolio insurance
• Optimal investment, consumption and proportional reinsurance for an insurer with option type payoff
• Hedging insurance books
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• Utility-based valuation and hedging of basis risk with partial information
• Pricing and hedging of derivatives based on nontradable underlyings
• Utility-based hedging and pricing with a nontraded asset for jump processes
• Combined custom hedging: optimal design, noninsurable exposure, and operational risk management
• Price index insurances in the agriculture markets
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