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BuR - Business Research

BuR - Business Research
Official Open Access Journal of VHB - Verband der Hochschullehrer für Betriebswirtschaft e.V.
German Academic Association for Business Research

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The Risk Management of Minimum Return Guarantees

Abstract

Contracts paying a guaranteed minimum rate of return and a fraction of a positive excess rate, which is specified relative to a benchmark portfolio, are closely related to unit-linked life-insurance products and can be considered as alternatives to direct investment in the underlying benchmark. They contain an embedded power option, and the key issue is the tractable and realistic hedging of this option, in order to rigorously justify valuation by arbitrage arguments and prevent the guarantees from becoming uncontrollable liabilities to the issuer. We show how to determine the contract parameters conservatively and implement robust risk-management strategies.

Keywords

URN: urn:nbn:de:0009-20-13928

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Any party may pass on this Work by electronic means and make it available for download under the terms and conditions of the authorcontract. The text of the license may be accessed and retrieved via Internet at no url given

Recommended citation

Mahayni A, Schlögl E (2008). The Risk Management of Minimum Return Guarantees. BuR - Business Research, Vol. 1, Iss. 1, pp. 55-76, URN: urn:nbn:de:0009-20-13928

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