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Managing Variable Annuity GMxB Guarantees
1. Equity-Based Investment
Guarantee Conference
Managing Variable Annuity
Guaranteed Minimum Death &
Living Benefits
8:30 am – 10:00 am
October 28th, 2008
Boston, MA, USA
Frank Zhang, CFA, FRM, FSA, MSCF, PRM
Director, Equity Derivatives
Tel: 1-212-278-6273
FRANK.ZHANG@SGCIB.COM
1987-2007
Equity Derivatives House of the Year
“Modern Great”
in Equity Derivatives
5. Lessons Learned from Recent Market Performance
Markets in Fear
* Source WSJ.com article “What's Behind the Surge in the VIX” 10/23/08
GMxB Solutions 5
6. Hedging programs P/L:
Dynamic hedging program
Dynamic Hedge Performance With Decrements
10,000,000 160,000
140,000
8,000,000
120,000
6,000,000
100,000
4,000,000
co n a e
A c u t V lu
80,000
2,000,000
60,000
-
40,000
(2,000,000)
20,000
(4,000,000) -
0 100 200 300 400 500
Option Value Cum Futures G/(L) + PV of Option Premium Account Value
Delta/Rho dynamic hedging:
In general bleeds money over time through buy high and sell low
The cost of hedge bleeding is equivalent to the up front option premium
But with less certainty even if the realized vol is the same as the implied vol, due to path dependency.
Even if no up front premium is spent initially
The amount can be implicitly assumed borrowed from the collection of future fees
The amount is borrowed and has to be paid back GMxB Solutions 6
7. Example: Delta Hedging Annual Ratchet GMxB
Delta hedging of an annual ratchet GMxB (i.e. look-back options), especially under
real-world conditions, is more costly and difficult than hedging vanilla puts
P/L Dispersion In Hedging Simulations
35%
30%
25%
frequency
20%
Look-back Put
Vanilla Put
15%
10%
5%
0%
-20% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% More
P/L (% of Initial Value)
GMxB Solutions 7