THE VALUATION OF LONGEVITY BOND AS A HEDGING INSTRUMENT FOR LIFE INSURANCE AND LIFE ANNUITIES WITH STOCHASTIC SHOCK OF MORTALITY (BERNOULLI PROCESS AND TRUNCATED NORMAL DISTRIBUTION)

• Main Author: Yunita, Elma
• Format: Final Project
• Language: Indonesia
• Subjects: Matematika
• Online Access: https://digilib.itb.ac.id/gdl/view/34014
• Institution: Institut Teknologi Bandung

Longevity bond is a financial instrument equipped with unique coupon payment structure, which enables the bond to give some hedging effects for life insurance and life annuities. The coupon payment structure is floating and the amount depends on the mortality rate during the bond contract. Hence, in this final project, the method used to determine the value of longevity bond involves the arrival of pro-mortality and anti-mortality factors (shock of mortality). The combination of Bernoulli process and truncated normal distribution is used to model the arrival of shock of mortality which is stochastic indeed. The valuation of longevity bond is carried out under the risk-adjusted mortality distribution as well, that is the distribution which has accommodated the probability of shock of mortality arrival. The Wang transform is one of some methods that can be used to undertake an adjustment on mortality distribution. The discussion of the bond price sensitivity towards market interest rate fluctuation is also included in this final project