Completing the Survivor Derivatives Market: A General Pricing Framework

Paul Dawson, David Blake, Andrew J.G. Cairns and Kevin Dowd

Survivorship is a risk of considerable importance to developed economies. Survivor
derivatives are in their early stages and manage a risk which is arguably more serious
than that managed by credit derivatives. This paper takes the approach developed by
Dowd et al. [2006], Olivier and Jeffery [2004], Smith [2005] and Cairns [2007] for
pricing survivor swaps and shows its application to the pricing of other forms 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 survivor options 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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