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Quantile hedging in models with dividends and application to equity-linked life insurance contracts

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Abstract

The paper demonstrates the effect of the dividends on pricing and hedging the European contingent claims under a budget constraint and presents insurance applications. Explicit formulae for the quantile pricing and hedging of the European call option are derived assuming the jump-diffusion model of the financial market. These results are used to determine the premium of the pure endowment with fixed guarantee equity-linked life insurance contract as well as the survival probability of the insured. A numerical example is given to illustrate the role of dividends in valuation and risk management of such insurance contracts.

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Notes

  1. The results presented here are based on [4]. The Black–Scholes case with dividends in a similar context is also discussed in [4].

  2. Rounded to two decimal places.

  3. Using VBT ANB Male Unismoke 2015 mortality table, www.soa.org.

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Acknowledgements

We would like to thank the editor and the anonymous referee for careful reading of the article and providing a constructive feedback.

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Authors and Affiliations

  1. Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB, Canada

    Anna Glazyrina & Alexander Melnikov

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  1. Anna Glazyrina
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  2. Alexander Melnikov
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Correspondence to Anna Glazyrina.

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The research was partially supported by the NSERC Discovery Grant RES0043487.

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Glazyrina, A., Melnikov, A. Quantile hedging in models with dividends and application to equity-linked life insurance contracts. Math Finan Econ 14, 207–224 (2020). https://doi.org/10.1007/s11579-019-00252-y

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  • DOI: https://doi.org/10.1007/s11579-019-00252-y

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