Robust Hedging of Withdrawal Guarantees (Extended Version)

Abstract

Withdrawal guarantees ensure the periodical deduction of a constant dollar-amount from a fund investment for a fixed number of periods. If the fund depletes before the last withdrawal, the guarantor has to finance the outstanding withdrawals. We derive a robust hedging strategy which leads to closed form solutions for the guarantee value.

arXiv commentStatic hedging, model selection problem, local volatility models, stochastic volatility models, Levy process models, variable annuities, guaranteed minimun withdrawal benefit (GMWB) products, (29 pages, 8 figures)