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On the calibration of mortality forward curves

✍ Scribed by Johnny Siu-Hang Li; Andrew Cheuk-Yin Ng; Wai-Sum Chan

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 348 KB
Volume: 31
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20500

No coin nor oath required. For personal study only.

✦ Synopsis

In 2007, a major investment bank launched a product called "q-forward," which may be regarded as a forward contract on a mortality rate. The pricing of mortality forwards is similar to the pricing of other forward-rate contracts, such as interest-rate forwards or foreign exchange forwards. In particular, since investors require compensation to take on longevity risk, the forward mortality rate at which q-forward contracts will trade will be smaller than the expected mortality rate. The relationship between the forward rate and the time to maturity is called a mortality forward curve. In this study, we contribute a method for calibrating mortality forward curves. This method consists of two parts, one of which is the generation of the distribution of future mortality rates, and the other of which is the transformation of the distribution into its risk-neutral counterpart, using the idea of canonical valuation developed by Stutzer, M. (1996). To illustrate the method,

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