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

  • Elias S. W. Shiu
Chapter
Part of the Huebner International Series on Risk, Insurance, and Economic Security book series (HSRI, volume 17)

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.

Keywords

Interest Rate Financial Management Life Insurance Company Interest Rate Risk Bond Portfolio 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media New York 1993

Authors and Affiliations

  • Elias S. W. Shiu
    • 1
  1. 1.University of IowaUSA

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