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Asset/Liability Management: From Immunization to Option-Pricing Theory

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Financial Management of Life Insurance Companies

Abstract

It was nearly forty years ago when the eminent British actuary F.M. Redington published the paper “Review of the Principles of Life-Office Valuations,” in which he suggested the principle that there should be equal and parallel treatment in the valuation of assets and liabilities. His theory of immunization for insulating a portfolio against interest rate fluctuations follows as an immediate consequence of this principle. A deficiency in Redington’s model is the assumption that the asset and liability cash flows are fixed and certain. In this paper we show that his theory can be extended to the general case of interest-sensitive cash flows (SPDA, UL, MBS, etc.) by means of modern option-pricing theory.

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Author information

Authors and Affiliations

  1. University of Iowa, USA

    Elias S. W. Shiu (Principal Financial Group Professor)

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  1. Elias S. W. Shiu
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Editor information

Editors and Affiliations

  1. The Wharton School, University of Pennsylvania, USA

    J. David Cummins

  2. Villanova University, USA

    Joan Lamm-Tennant

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© 1993 Springer Science+Business Media New York

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Shiu, E.S.W. (1993). Asset/Liability Management: From Immunization to Option-Pricing Theory. In: Cummins, J.D., Lamm-Tennant, J. (eds) Financial Management of Life Insurance Companies. Huebner International Series on Risk, Insurance, and Economic Security, vol 17. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-2208-5_8

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  • DOI: https://doi.org/10.1007/978-94-011-2208-5_8

  • Publisher Name: Springer, Dordrecht

  • Print ISBN: 978-94-010-4979-5

  • Online ISBN: 978-94-011-2208-5

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