We study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. We show that firms that are likely to face costly external finance increase hedging after...

I study dynamic hedging for variable annuities under basis risk. Basis risk, which arises from the imperfect correlation between the underlying fund and the proxy asset used for hedging, has a highly negative impact on the hedging performance. I investigate whether the choice of a suitable...

This paper provides a simple model for basis risk in a longevity framework, by separating common and idiosyncratic risk factors. Basis risk is captured by a single parameter, that measures the co-movement between the portfolio and the reference population. In this framework, the paper sets out...

This paper provides a closed-form Value-at-Risk (VaR) for the net exposure of an annuity provider, taking into account both mortality and interest-rate risk, on both assets and liabilities. It builds a classical risk-return frontier and shows that hedging strategies -- such as the transfer of...

We develop a normative framework for the optimal design, value assessment, and risk management integration of combined custom contingent claims. A risk averse firm faces a mix of financially insurable and noninsurable risk. The firm seeks optimal positioning in a pair of custom claims, one...

In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. The brevity risk due to a pandemic is similar to the property risk associated with...

This article constructs triple-difference tests around shifts in the supply of risk management instruments available to agricultural producers to reveal a positive relation between risk management and productivity. This relation is more robust when producers adopt instruments with payoffs linked...

This paper investigates corporate hedging under regret aversion. Regret-averse firms try to avoid deviations of their hedging policy from the ex post best policy, an intuitive consideration if one has to justify one's decisions afterward. The study presents a model of a firm that faces uncertain...

Even though financial risk management has the ability to generate value, the use of financial derivatives among nonfinancial corporations remains limited. We identify a channel that contributes to this limited use: the decoupling of derivatives losses and operational gains. Specifically, firms...

We examine the determinants of corporate speculation and challenge the extant, conflicting evidence. Separating risk management (reducing currency-specific FX exposure) from speculation (increasing or holding currency-specific FX exposure constant), we provide unprecedented evidence that...