The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark
The main purpose of this paper is to examine the growing use of derivatives by Danish pension institutions as a risk management tool to hedge embedded options on their balance sheets. Throughout the 1980s and 1990s it was a widespread practice for...
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| Format: | Policy Research Working Paper |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2007/03/7435986/use-derivatives-hedge-embedded-options-case-pension-institutions-denmark http://hdl.handle.net/10986/7182 |
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okr-10986-71822021-04-23T14:02:33Z The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark Ladekarl, Jeppe Ladekarl, Regitze Andersen, Erik Brink Vittas, Dimitri ACCOUNTING ACCOUNTING RULES ACCOUNTING STANDARDS ANNUITIES ASSET PRICES ASSETS BALANCE SHEETS BOND YIELDS BONDS BUNDLING CAPITAL REQUIREMENTS CENTRAL BANK COUNTERPARTY RISKS COVERAGE CREDIT RISK CREDIT RISK EXPOSURE DEREGULATION DERIVATIVES DISCOUNT RATE DIVIDENDS EXPECTED RETURN FINANCIAL MARKETS FINANCIAL PRODUCTS FINANCIAL RISK FISCAL POLICY FIXED INCOME FIXED INCOME MARKETS FOREIGN CURRENCY FOREIGN EQUITIES FUTURES GDP GOVERNMENT BONDS GROWTH RATE HOUSING INCOME INCOME TAXES INSPECTIONS INSURANCE PRODUCTS INTEREST RATE INTEREST RATE SWAPS INTEREST RATES INVESTMENT BANKERS INVESTMENT RETURN INVESTMENT RETURNS LIFE INSURANCE LIFE INSURANCE COMPANIES MARKET RISK MORTGAGES NOMINAL INTEREST RATES OCCUPATIONAL PENSION PLANS PAID UP CAPITAL PAYOUT PENSION COVERAGE PENSION FUNDS PENSION PLANS PENSION POLICIES PENSION SCHEMES PENSIONS POLICYHOLDERS PORTFOLIO PORTFOLIOS PRICE LEVELS PRIVATE EQUITY PRUDENTIAL REGULATION REGULATORY FRAMEWORK REGULATORY RULES RESERVES RETAINED EARNINGS RETURN ON INVESTMENTS RISK EXPOSURE RISK MANAGEMENT SAVINGS SIDE EFFECTS SOLVENCY STATEMENTS SWAPS TAX REVENUES VALUATION WAGES The main purpose of this paper is to examine the growing use of derivatives by Danish pension institutions as a risk management tool to hedge embedded options on their balance sheets. Throughout the 1980s and 1990s it was a widespread practice for Danish pension institutions to guarantee a minimum interest rate on new pension policies. With the new millennium global interest rates declined steeply and equity markets came crashing down. Suddenly the guarantees on pension contracts were in the money. The policies already written could not be changed, leaving liabilities and assets mismatched, profits in the red, and capital reserves drained. Out of necessity, and in some cases virtue, Danish pension institutions turned in scale to derivatives, allowing for a more active approach to hedging, asset and liability management, and even profit generation. Through the use of derivatives, pension institutions have avoided the need to renegotiate their guaranteed contracts with policy holders. They have succeeded as an industry in transforming their pay-off curves and have emerged with better matched asset/liability positions and lower exposure to interest rate risk. But the expanded use of derivatives also raises some risk management and regulatory issues, such as operational and counterparty risks as well as effective internal control systems and regulatory oversight. 2012-06-05T20:29:16Z 2012-06-05T20:29:16Z 2007-03 http://documents.worldbank.org/curated/en/2007/03/7435986/use-derivatives-hedge-embedded-options-case-pension-institutions-denmark http://hdl.handle.net/10986/7182 English Policy Research Working Paper; No. 4159 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Europe and Central Asia Denmark |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ACCOUNTING ACCOUNTING RULES ACCOUNTING STANDARDS ANNUITIES ASSET PRICES ASSETS BALANCE SHEETS BOND YIELDS BONDS BUNDLING CAPITAL REQUIREMENTS CENTRAL BANK COUNTERPARTY RISKS COVERAGE CREDIT RISK CREDIT RISK EXPOSURE DEREGULATION DERIVATIVES DISCOUNT RATE DIVIDENDS EXPECTED RETURN FINANCIAL MARKETS FINANCIAL PRODUCTS FINANCIAL RISK FISCAL POLICY FIXED INCOME FIXED INCOME MARKETS FOREIGN CURRENCY FOREIGN EQUITIES FUTURES GDP GOVERNMENT BONDS GROWTH RATE HOUSING INCOME INCOME TAXES INSPECTIONS INSURANCE PRODUCTS INTEREST RATE INTEREST RATE SWAPS INTEREST RATES INVESTMENT BANKERS INVESTMENT RETURN INVESTMENT RETURNS LIFE INSURANCE LIFE INSURANCE COMPANIES MARKET RISK MORTGAGES NOMINAL INTEREST RATES OCCUPATIONAL PENSION PLANS PAID UP CAPITAL PAYOUT PENSION COVERAGE PENSION FUNDS PENSION PLANS PENSION POLICIES PENSION SCHEMES PENSIONS POLICYHOLDERS PORTFOLIO PORTFOLIOS PRICE LEVELS PRIVATE EQUITY PRUDENTIAL REGULATION REGULATORY FRAMEWORK REGULATORY RULES RESERVES RETAINED EARNINGS RETURN ON INVESTMENTS RISK EXPOSURE RISK MANAGEMENT SAVINGS SIDE EFFECTS SOLVENCY STATEMENTS SWAPS TAX REVENUES VALUATION WAGES |
| spellingShingle |
ACCOUNTING ACCOUNTING RULES ACCOUNTING STANDARDS ANNUITIES ASSET PRICES ASSETS BALANCE SHEETS BOND YIELDS BONDS BUNDLING CAPITAL REQUIREMENTS CENTRAL BANK COUNTERPARTY RISKS COVERAGE CREDIT RISK CREDIT RISK EXPOSURE DEREGULATION DERIVATIVES DISCOUNT RATE DIVIDENDS EXPECTED RETURN FINANCIAL MARKETS FINANCIAL PRODUCTS FINANCIAL RISK FISCAL POLICY FIXED INCOME FIXED INCOME MARKETS FOREIGN CURRENCY FOREIGN EQUITIES FUTURES GDP GOVERNMENT BONDS GROWTH RATE HOUSING INCOME INCOME TAXES INSPECTIONS INSURANCE PRODUCTS INTEREST RATE INTEREST RATE SWAPS INTEREST RATES INVESTMENT BANKERS INVESTMENT RETURN INVESTMENT RETURNS LIFE INSURANCE LIFE INSURANCE COMPANIES MARKET RISK MORTGAGES NOMINAL INTEREST RATES OCCUPATIONAL PENSION PLANS PAID UP CAPITAL PAYOUT PENSION COVERAGE PENSION FUNDS PENSION PLANS PENSION POLICIES PENSION SCHEMES PENSIONS POLICYHOLDERS PORTFOLIO PORTFOLIOS PRICE LEVELS PRIVATE EQUITY PRUDENTIAL REGULATION REGULATORY FRAMEWORK REGULATORY RULES RESERVES RETAINED EARNINGS RETURN ON INVESTMENTS RISK EXPOSURE RISK MANAGEMENT SAVINGS SIDE EFFECTS SOLVENCY STATEMENTS SWAPS TAX REVENUES VALUATION WAGES Ladekarl, Jeppe Ladekarl, Regitze Andersen, Erik Brink Vittas, Dimitri The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| geographic_facet |
Europe and Central Asia Denmark |
| relation |
Policy Research Working Paper; No. 4159 |
| description |
The main purpose of this paper is to
examine the growing use of derivatives by Danish pension
institutions as a risk management tool to hedge embedded
options on their balance sheets. Throughout the 1980s and
1990s it was a widespread practice for Danish pension
institutions to guarantee a minimum interest rate on new
pension policies. With the new millennium global interest
rates declined steeply and equity markets came crashing
down. Suddenly the guarantees on pension contracts were in
the money. The policies already written could not be
changed, leaving liabilities and assets mismatched, profits
in the red, and capital reserves drained. Out of necessity,
and in some cases virtue, Danish pension institutions turned
in scale to derivatives, allowing for a more active approach
to hedging, asset and liability management, and even profit
generation. Through the use of derivatives, pension
institutions have avoided the need to renegotiate their
guaranteed contracts with policy holders. They have
succeeded as an industry in transforming their pay-off
curves and have emerged with better matched asset/liability
positions and lower exposure to interest rate risk. But the
expanded use of derivatives also raises some risk management
and regulatory issues, such as operational and counterparty
risks as well as effective internal control systems and
regulatory oversight. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Ladekarl, Jeppe Ladekarl, Regitze Andersen, Erik Brink Vittas, Dimitri |
| author_facet |
Ladekarl, Jeppe Ladekarl, Regitze Andersen, Erik Brink Vittas, Dimitri |
| author_sort |
Ladekarl, Jeppe |
| title |
The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| title_short |
The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| title_full |
The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| title_fullStr |
The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| title_full_unstemmed |
The Use of Derivatives to Hedge Embedded Options : The Case of Pension Institutions in Denmark |
| title_sort |
use of derivatives to hedge embedded options : the case of pension institutions in denmark |
| publisher |
World Bank, Washington, DC |
| publishDate |
2012 |
| url |
http://documents.worldbank.org/curated/en/2007/03/7435986/use-derivatives-hedge-embedded-options-case-pension-institutions-denmark http://hdl.handle.net/10986/7182 |
| _version_ |
1764401577020358656 |