Optimal cross hedging of insurance derivatives
Please always quote using this URN:urn:nbn:de:0296-matheon-6521
- 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.
Author: | Stefan Ankirchner, Peter Imkeller, Alexandre Popier |
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URN: | urn:nbn:de:0296-matheon-6521 |
Referee: | Dirk Becherer |
Document Type: | Preprint, Research Center Matheon |
Language: | English |
Date of first Publication: | 2009/04/08 |
Release Date: | 2009/03/08 |
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Institute: | Humboldt-Universität zu Berlin |
Preprint Number: | 657 |