A new option for mortality–interest rates. Issue 2 (13th December 2022)

• Record Type: Journal Article
• Authors: Lin, Tzuling; Tsai, Cary Chi‐Liang
• Is Part Of: Journal of futures markets. Volume 43:Issue 2(2023)
• Page Start: 273
• Page End: 293
• Publication Date: 2022-12-13
• Subjects: interest rate risk -- longevity risk -- mortality risk -- risk‐neutral valuation; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22390
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: We propose a new type of mortality–interest option related to a new random variable, the force of mortality–interest denoted as μ * ${\mu }^{* }$, the addition of the force of mortality and the force of interest. We assume μ * ${\mu }^{* }$ moves approximately linearly, design the new mortality–interest option, and then derive closed‐form formulas for its expected values. We show that using the new mortality–interest options, an annuity provider and a life insurer can, respectively, hedge the longevity and mortality risks with interest rate risk; a financial intermediary selling the new options can benefit from natural hedges resulted from two‐side businesses with the annuity provider and life insurer.