Longevity Bonds: Financial Engineering, Valuation and Hedging

David Blake, Andrew Cairns, Kevid Dowd and Richard MacMinn

This article examines the main characteristics of longevity bonds (LBs) and
shows that they can take a large variety of forms which can vary enormously
in their sensitivities to longevity shocks. We examine different ways of fi-
nancially engineering LBs and consider problems arising from the dearth
of ultra-long government bonds and the choice of the reference population
index. The article also looks at valuation issues in an incomplete markets
context and finishes with an examination of how LBs can be used as a risk
management tool for hedging longevity risks.

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