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INTEREST RATE RISK: A comparative study aimed at finding the most crucial shift in interest rate curves for a life insurance company
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
2019 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Risk management is applied in many financial institutions under regulatory supervision.

Life insurance companies face many challenges to ensure policy holders

of future payouts. The inverted balance sheet of life insurance companies imply

that the policy holder pay premiums in advance to the insurance company to later

receive payouts at the age of retirement. This means a great responsibility for the

life insurance company to be able to meet future liabilities. Due to this, one of

the largest risks facing a life insurance company is the interest rate risk. Future

liabilities depend on the interest rates and the difference in duration in assets and

liabilities creates an imperfect negative correlation between the movements in assets

and liabilities when the interest rate change.

The bond market holds different types of bonds such as government bonds, housing

bonds and corporate bonds with different maturities within each subgroup.

The relationship between these subgroups and maturities within these subgroups

are interesting to investigate in a forecasting point of view. This relationship is

usually referred to as the term structure of interest rates and changes in the term

structure are referred to as shifts.

This thesis aims to find which of the three shifts, level, slope and curvature, that

is most important to capture in interest rate models. This is investigated using

three different simulation techniques and the results show that the first shift representing

a level shift of the whole term structure has the largest effect on Skandia’s

balance sheet.

Place, publisher, year, edition, pages
2019. , p. 58
National Category
Mathematics
Identifiers
URN: urn:nbn:se:umu:diva-160248OAI: oai:DiVA.org:umu-160248DiVA, id: diva2:1325511
External cooperation
Skandia
Educational program
Master of Science in Engineering and Management
Supervisors
Examiners
Available from: 2019-06-19 Created: 2019-06-16 Last updated: 2019-06-19Bibliographically approved

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