They are unlikely to discourage speculation on their own in the absence of broader macro-economic policies, given the asymmetric risk-reward payoff profile
of SAR speculative trades, in our view.
As shown in Figure 2, the shape of the payoff profile
is roughly a mirror image of the debt profile: the payoff rate declines rapidly for younger ages, becomes steady in the middle age range, and starts to increase in later life.
It represents the same risk or payoff profile as a long position in a risky asset or buying a forward or futures contract or swap.
This is the payoff profile of a short position in a risky asset or stock or selling a forward, futures, or swap contract.
This is another "natural hedge" in that one risk profile is offset by an opposite payoff profile. Such on-balance sheet risk management is inappropriately criticized when only one part of the hedge is evaluated.
Offsetting payoff profiles are shown in the lower panel of Figure 1.
The literature demonstrates that forward, futures, and swap contracts are equivalent in their payoff profiles, but have different costs and risks themselves.
The offsetting payoff profiles for a short position in risky assets or risky securities is: buy forwards or futures, increase long positions in assets, long a call plus short a put, or increase the ratio of risky assets to riskless assets.
(In a multiperiod model, not all returns above the fixed cost threshold would be allocated to policyholders, because mutualism usually entails leaving some equity "on the table" for future policyholders.) The payoff profiles
in Figure 5 illustrate the impossibility of a riskier portfolio dominating a less risky one by stochastic dominance.