There have been several proposed strategies for natural hedging, ranging from static hedging approaches in Tsai, Wang, and Tzeng (2010) and Gatzert and Wesker (2012) to the dynamic hedging
approaches in Wang et al.
West pioneered the company's use of dynamic hedging
, leading to the creation of the Allianz Life internal hedging platform in 2006.
Risk is tightly controlled via a dynamic hedging
strategy aimed at reducing the exchange rate risk.
Earnings of MFC, an International Financial Reporting Standards' reporter, have recently been impacted by the volatility in its realized and unrealized gains on assets supporting insurance and investment contract liabilities mainly due to the impact of interest rate changes on bond and fixed income derivative positions as well as interest rate swaps that support the company's dynamic hedging
This form of tactical risk management doesn't use any excessively fancy derivatives -- it's just selling index call options, after all -- but, historically, it can and does generate alpha: Over the past 10 years, Gargoyle's dynamic hedging
strategy has produced an annual compound rate of return of 3.
Connecticut Insurance Commissioner Tom Sullivan expressed concern about dynamic hedging
, saying an insurer would only be "as strong as one's counterparties.
The firms follow a dynamic hedging
strategy in which they progressively adapt their hedged positions as interest rate levels change.
Shiu, 1996, "Actuarial Bridges to Dynamic Hedging
and Option Pricing", Insurance Mathematics and Economics, 18:183-218
A dynamic hedging
strategy can be quite successful when prices move continuously, in small steps, but is increasingly ineffective the larger are price discontinuities, or price jumps.
The simplest, most common dynamic hedging
, which limits exposure to market movements, is achieved by offsetting the Delta on variable annuities with options or futures on publicly traded indices, Tillinghast said.
Meanwhile, GSE counterparties rely predominantly on dynamic hedging
strategies, with computer hedging models calculating the quantities of securities to buy or sell in the event of changing interest rates.
We then consider how the hedging of interest rate options could produce liquidity effects in the medium-term segment of the yield curve, where market survey data suggest that dynamic hedging
of options could have the largest impact on transaction flows and thus on market liquidity.