Abstract
AbstractIn this paper, we introduce the 3-step hedge-based valuation for the valuation of hybrid claims. We consider an insurance portfolio which is exposed to traded risks, diversifiable risks and non-traded systematic risks. The class of 3-step hedge-based valuations is equivalent with the class of fair valuations. Closed-form solutions are derived for a portfolio of unit-linked contracts under the assumption of independence between financial and non-financial risks. We also consider the additive 3-step valuation and show that this additive valuation is a member of the more general class of 3-step hedge-based valuations.
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