Chapter

Hedging Segregated Fund Guarantees

Olivia S. Mitchell and Kent Smetters

in The Pension Challenge

Published in print November 2003 | ISBN: 9780199266913
Published online August 2004 | e-ISBN: 9780191601323 | DOI: http://dx.doi.org/10.1093/0199266913.003.0010
 Hedging Segregated Fund Guarantees

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Segregated funds have become popular investments for self-directed pension plans in Canada. This chapter examines the hedging strategies that allow underwriting companies to lower their risk exposure to these contracts. The simple delta-neutral hedging strategy can reduce downside risk if it is possible to set up a hedging position using the underlying mutual fund, or a perfectly correlated asset. However, the underlying mutual fund cannot be used when constructing the hedging portfolio.

Keywords: segregated funds; hedging; risk management; maturity guarantees; Canada; investment

Chapter.  9463 words.  Illustrated.

Subjects: Financial Markets

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