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arXiv · 1405.1212

Market risk modelling in Solvency II regime and hedging options not using underlying

Przemysław Klusik
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Abstract

In the paper we develop mathematical tools of quantile hedging in incomplete market. Those could be used for two significant applications: o calculating the \textbf{optimal capital requirement imposed by Solvency II} (Directive 2009/138/EC of the European Parliament and of the Council) when the market and non-market risk is present in insurance company. We show hot to find the minimal capital $V_0$ to provide with the one-year hedging strategy for insurance company satisfying $E\left[{\mathbf 1}_{\{V_1 \geq D\}}\right]=0.995$, where $V_1$ denotes the value of insurance company in one year time and $D$ is the payoff of the contract. o finding a hedging strategy for derivative not using underlying but an asset with dynamics correlated or in some other way dependent (no deterministically) on underlying. The work is a generalisation of the work of Klusik and Palmowski \cite{KluPal}. Keywords: quantile hedging, solvency II, capital modelling, hedging options on nontradable asset.

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Przemysław Klusik. 2014-05-06. Market risk modelling in Solvency II regime and hedging options not using underlying. https://arxiv.org/abs/1405.1212

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