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A new option for mortality–interest rates

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  • Tzuling Lin
  • Cary Chi‐Liang Tsai

Abstract

We propose a new type of mortality–interest option related to a new random variable, the force of mortality–interest denoted as μ * ${\mu }^{* }$, the addition of the force of mortality and the force of interest. We assume μ* ${\mu }^{* }$ moves approximately linearly, design the new mortality–interest option, and then derive closed‐form formulas for its expected values. We show that using the new mortality–interest options, an annuity provider and a life insurer can, respectively, hedge the longevity and mortality risks with interest rate risk; a financial intermediary selling the new options can benefit from natural hedges resulted from two‐side businesses with the annuity provider and life insurer.

Suggested Citation

  • Tzuling Lin & Cary Chi‐Liang Tsai, 2023. "A new option for mortality–interest rates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 273-293, February.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:2:p:273-293
    DOI: 10.1002/fut.22390
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