• The Korean Journal of Applied Statistics
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• v.26 no.1
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• pp.187-200
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• 2013

In this paper, we deal with the problem of deciding a hedging volatility for ATM plain options when we hedge those options based on geometric Brownian motion. For this, we study the relation between hedging volatility and hedge profit&loss(P&L) as well as perform Monte Carlo simulations and real data analysis to examine how differently hedge P&L is affected by the selection of hedging volatility. In conclusion, using a relatively low hedging volatility is found to be more favorable for hedge P&L when underlying asset prices are expected to be range bound; however, a relatively high volatility is found to be favorable when underlying asset prices are expected to move on a trend.

• Korean System Dynamics Review
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• v.15 no.4
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• pp.5-28
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• 2014

Derivatives can be easily bought by those companies that need to hedge foreign currency debt or foreign currency assets through the financial market, considering their exchange rate exposure from international trade. The derivatives market has been growing rapidly due to the needs for investment and hedging. To manage foreign exchange risk, companies hedge risks through financial derivatives. According to our study, hedging is an effective way to mitigate the impact of exposure to exchange risk, as long as companies are only hedging underlying assets. Yet, covetous attitude toward the profit from derivatives and unexpected changes in exchange rate can cause problems for companies. This study analyzed the structural risks of derivatives with analysis of system dynamics. In particular, many companies suffered substantial loss due to KIKO during the economic crisis. We explained the problem therein through dynamic analysis. In addition, we revealed the structural problem that could cause a sudden spike in losses through simulations.

• Communications for Statistical Applications and Methods
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• v.28 no.6
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• pp.655-671
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• 2021

This study analyzes the premium risk of insurers in Korea, which is expected to experience the fastest population aging in the world. Based on the Lee-Carter model, we generate 10,000 scenarios for the number of future survivors in the group of the 10,000 policyholders of life annuity. According to the result of simulation study, the probability of insurer's loss for both groups of male and female policyholders is very low. This result indicates that the premium risk of insurers is not as great as the insurer's concern. This study also suggests introduction of the longevity swap as an alternative to manage the premium risk for the insurer which sells life annuity products. The longevity swap allows insurers to hedge premium risk and reduce capital burden due to the premium risk inherent in life annuity. This study also shows through examples that the counterparty of swap deal may have excess profit in exchange for taking premium risk.