Actuarial Finance: Derivatives, Quantitative Models and Risk Management

564 Pages·2019·10.29 MB·english

by  Boudreault

MATHIEU BOUDREAULT · JEAN-FRANÇOIS RENAUD
A CT U A R I A L
F I N A N C E
DERIVATIVES, QUANTITATIVE MODELS
AND RISK MANAGEMENT

ActuarialFinance

Actuarial Finance
Derivatives,QuantitativeModelsandRiskManagement
MathieuBoudreaultandJean-Franc¸oisRenaud
Universite´duQue´beca`Montre´al,Canada
Thiseditionfirstpublished2019
©2019JohnWiley&Sons,Inc.
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inany
formorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermittedbylaw.
Adviceonhowtoobtainpermissiontoreusematerialfromthistitleisavailableat
http://www.wiley.com/go/permissions.
TherightofMathieuBoudreaultandJean-Franc¸oisRenaudtobeidentifiedastheauthorsofthisworkhasbeen
assertedinaccordancewithlaw.
RegisteredOffice
JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,USA
EditorialOffice
111RiverStreet,Hoboken,NJ07030,USA
Fordetailsofourglobaleditorialoffices,customerservices,andmoreinformationaboutWileyproductsvisitusat
www.wiley.com.
Wileyalsopublishesitsbooksinavarietyofelectronicformatsandbyprint-on-demand.Somecontentthatappears
instandardprintversionsofthisbookmaynotbeavailableinotherformats.
LimitofLiability/DisclaimerofWarranty
Whilethepublisherandauthorshaveusedtheirbesteffortsinpreparingthiswork,theymakenorepresentationsor
warrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthisworkandspecificallydisclaimall
warranties,includingwithoutlimitationanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.
Nowarrantymaybecreatedorextendedbysalesrepresentatives,writtensalesmaterialsorpromotionalstatements
forthiswork.Thefactthatanorganization,website,orproductisreferredtointhisworkasacitationand/or
potentialsourceoffurtherinformationdoesnotmeanthatthepublisherandauthorsendorsetheinformationor
servicestheorganization,website,orproductmayprovideorrecommendationsitmaymake.Thisworkissoldwith
theunderstandingthatthepublisherisnotengagedinrenderingprofessionalservices.Theadviceandstrategies
containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaspecialistwhereappropriate.
Further,readersshouldbeawarethatwebsiteslistedinthisworkmayhavechangedordisappearedbetweenwhen
thisworkwaswrittenandwhenitisread.Neitherthepublishernorauthorsshallbeliableforanylossofprofitorany
othercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages.
LibraryofCongressCataloging-in-Publicationdataisavailableforthisbook.
9781119137009(hardback)
CoverDesign:Wiley
CoverImage:©precinbe/iStock.com
Setin10/12ptWarnockProbyAptaraInc.,NewDelhi,India
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
A` Joe¨lle,Justine,Raphae¨letThomas
A` Julie,E´tienneetAnne-Sophie

vii
Contents
Acknowledgments xvii
Preface xix
PartI Introductiontoactuarialfinance 1
1 Actuariesandtheirenvironment 3
1.1 Keyconcepts 3
1.1.1 Whatisinsurance? 4
1.1.2 Actuarialliabilitiesandfinancialassets 4
1.1.3 Actuarialfunctions 5
1.2 Insuranceandfinancialmarkets 6
1.2.1 Insurancemarket 6
1.2.2 Financialmarket 7
1.2.3 Insuranceisaderivative 8
1.3 Actuarialandfinancialrisks 8
1.4 Diversifiableandsystematicrisks 9
1.4.1 Illustrativeexample 9
1.4.2 Independence 10
1.4.3 Framework 11
1.4.4 Diversifiablerisks 11
1.4.5 Systematicrisks 12
1.4.6 Partiallydiversifiablerisks 14
1.5 Riskmanagementapproaches 15
1.6 Summary 16
1.7 Exercises 17
2 Financialmarketsandtheirsecurities 21
2.1 Bondsandinterestrates 21
2.1.1 Characteristics 21
2.1.2 Basicsofbondpricing 23
2.1.3 Termstructureofinterestrates 23
2.2 Stocks 29
2.2.1 Dividends 30
2.2.2 Reinvestingdividends 31
2.3 Derivatives 32
2.3.1 Typesofderivatives 33
2.3.2 Usesofderivatives 33
viii Contents
2.4 Structureoffinancialmarkets 35
2.4.1 Overviewofmarkets 35
2.4.2 Tradingandfinancialpositions 35
2.4.3 Marketfrictions 37
2.5 Mispricingandarbitrageopportunities 38
2.5.1 Takingadvantageofpriceinconsistencies 39
2.5.2 Arbitrageopportunitiesandno-arbitragepricing 40
2.6 Summary 42
2.7 Exercises 44
3 Forwardsandfutures 49
3.1 Framework 49
3.1.1 Terminology 49
3.1.2 Notation 50
3.1.3 Payoff 51
3.2 Equityforwards 52
3.2.1 Pricing 52
3.2.2 Forwardprice 54
3.2.3 Discreteandfixeddividends 57
3.2.4 Continuousandproportionaldividends 58
3.3 Currencyforwards 59
3.3.1 Background 59
3.3.2 Forwardexchangerate 60
3.4 Commodityforwards 61
3.5 Futurescontracts 62
3.5.1 Futuresprice 63
3.5.2 Marking-to-marketwithoutinterest 63
3.5.3 Marking-to-marketwithinterest 65
3.5.4 Equivalenceofthefuturesandforwardprices 66
3.5.5 Marking-to-marketinpractice 68
3.6 Summary 70
3.7 Exercises 72
4 Swaps 75
4.1 Framework 76
4.2 Interestrateswaps 77
4.2.1 Fixed-rateandfloating-rateloans 77
4.2.2 Cashflows 78
4.2.3 Valuation 80
4.2.4 Marketspecifics 85
4.3 Currencyswaps 87
4.3.1 Cashflows 87
4.3.2 Valuation 89
4.4 Creditdefaultswaps 90
4.4.1 Cashflows 91
4.4.2 Valuation 92
4.4.3 ComparingaCDSwithaninsurancepolicy 93
4.5 Commodityswaps 93