arXiv subjects

Huansang Xu

Publications and source records attributed to Huansang Xu.

4 recordsLinked to original sources

arXiv2026

Valuation of Variable Annuities with Equity Protection Swaps under Jumps and Default Risks

This paper examines the valuation and hedging of standard equity protection swap (EPS) products proposed by Xu et al.. To account for financial crises and counterparty default risk, we develop pricing frameworks based on Merton's jump-diffusion model and Szimayer's independent random time default model, under which closed-form valuation formulas and put-call parity relations for European options are derived. Hedging strategies for EPS products are analysed under jump and default risks. While static hedging remains effective in the absence of default, counterparty default risk leads to residual losses that cannot be fully hedged. These losses are quantified and used to define default-adjusted initial premiums under both Black-Scholes and jump-diffusion settings. Numerical results illustrate the effects of jump characteristics and default intensity on hedging costs and premiums, highlighting the importance of incorporating crisis and credit risks in EPS pricing and risk management.

q-fin.MF↗

arXiv2025

Fast catastrophe bond valuation with neural-network surrogates

Catastrophe bonds are increasingly important risk-transfer securities, but structural pricing is too slow for real-time valuation, screening, and sensitivity analysis. We develop a neural-network surrogate for the pricing operator of a compound-Poisson catastrophe bond model. Training labels are generated by Monte Carlo simulation with importance sampling, so the network learns variance-reduced structural prices rather than sparse market quotes which are difficult to extrapolate reliably. Across Gamma and Lognormal severity specifications, the selected networks attain very small absolute approximation error on the stated training domain. After training, 1000 contracts are priced in about 0.03--0.04 seconds, compared with tens to hundreds of seconds for Monte Carlo with importance sampling and many hours for a partial integro-differential equation benchmark. The result is a fast in-domain structural valuation engine that also produces economically interpretable sensitivities to catastrophe intensity, attachment threshold, and interest rates.

q-fin.PR↗

arXiv2024

Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps

In this paper, we explore the pricing and hedging strategies for an innovative insurance product called the equity protection swap(EPS). Notably, we focus on the application of EPSs involving cross-currency reference portfolios, reflecting the realities of investor asset diversification across different economies. The research examines key considerations regarding exchange rate fluctuations, pricing and hedging frameworks, in order to satisfy dynamic requirements from EPS buyers. We differentiate between two hedging paradigms: one where domestic and foreign equities are treated separately using two EPS products and another that integrates total returns across currencies. Through detailed analysis, we propose various hedging strategies with consideration of different types of returns - nominal, effective, and quanto - for EPS products in both separate and aggregated contexts. The aggregated hedging portfolios contain basket options with cross-currency underlying asset, which only exists in the OTC market, thus we further consider a superhedging strategy using single asset European options for aggregated returns. A numerical study assesses hedging costs and performance metrics associated with these hedging strategies, illuminating practical implications for EPS providers and investors engaged in international markets. We further employ Monte Carlo simulations for the basket option pricing, together with two other approximation methods - geometric averaging and moment matching. This work contributes to enhancing fair pricing mechanisms and risk management strategies in the evolving landscape of cross-currency financial derivatives.

q-fin.MF↗

arXiv2024

Equity Protection Swaps: A New Type of Investment Insurance for Holders of Superannuation Accounts

We propose to develop a new class of investment insurance products for holders of superannuation accounts in Australia, which we tentatively call equity protection swaps (EPSs). An EPS is a standalone financial derivative, which is reminiscent of a total return swap but also shares some features with the variable annuity known as the registered index-linked annuity (RILA). The buyer of an EPS obtains partial protection against losses on a reference portfolio and, in exchange, agrees to share portfolio gains with the insurance provider if the realized return on a reference portfolio is above a predetermined threshold. Formally, a generic EPS consists of protection and fee legs with participation rates agreed upon by the provider and holder. A general fair pricing formula for an EPS is obtained by considering a static hedging strategy based on traded European options. It is argued that to make the contract appealing to holders, the provider should select appropriate protection and fee rates that make the fair premium at the contract's inception equal to zero. A numerical study based on the Black-Scholes model and empirical tests based on market data for S\&P~500 and S&P/ASX~200 indices for 2020-2022 demonstrates the benefits of an EPS as an efficient investment insurance tool for superannuation accounts.

q-fin.PR↗