Quadratic hedging of equity-linked life insurance contracts under the real-world measure in discrete time

Article type: Research Article

Authors: Glazyrina, Anna | Melnikov, Alexander^{; *}

Affiliations: Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, Canada. E-mails: glazyrin@ualberta.ca, melnikov@ualberta.ca

Correspondence: [*] Corresponding author. E-mail: melnikov@ualberta.ca.

Abstract: We consider the quadratic hedging problem in the framework of discrete time financial market. Pricing and hedging algorithms are implemented by means of finding a P-discounting portfolio (a numeraire) such that discounted price processes are martingales under the physical measure P. The applications in pricing and hedging of equity-linked life insurance contracts are demonstrated.

Keywords: P-discounting portfolio, numeraire, equity-linked life insurance contracts, risk-minimization, quadratic hedging

DOI: 10.3233/RDA-170121

Journal: Risk and Decision Analysis, vol. 6, no. 2, pp. 167-175, 2017