Survivor Derivatives: A Consistent Pricing Framework

Paul Dawson, Kevin Dowd, A J.G. Cairns & David Blake

Survivorship risk is a significant factor in the provision of retirement income.
Survivor derivatives are in their early stages and offer potentially significant
welfare benefits to society. This article applies the approach developed by
Dowd et al. (2006), Olivier and Jeffery (2004), Smith (2005), and Cairns (2007)
to derive a consistent framework for pricing a wide range of linear survivor
derivatives, such as forwards, basis swaps, forward swaps, and futures. It
then shows how a recent option pricing model set out by Dawson et al.
(2009) can be used to price nonlinear survivor derivatives, such as survivor
swaptions, caps, floors, and combined option products. It concludes by considering
applications of these products to a pension fund that wishes to
hedge its survivorship risks.

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