Incorporates: Balance Sheet
Online from: 1999
Subject Area: Accounting and Finance
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|Title:||An intergenerational cross-country swap|
|Author(s):||Miret Padovani, (Geneva Finance Research Institute, University of Geneva, Geneva, Switzerland), Paolo Vanini, (Zürcher Kantonalbank, Zurich, Switzerland Swiss Finance Institute, Zurich, Switzerland)|
|Citation:||Miret Padovani, Paolo Vanini, (2010) "An intergenerational cross-country swap", Journal of Risk Finance, The, Vol. 11 Iss: 5, pp.446 - 463|
|Keywords:||Demographics, Hedging, Long-term planning, National economy, Risk analysis|
|Article type:||Research paper|
|DOI:||10.1108/15265941011092040 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||The authors thank Michel Habib, Hyun Song Shin, Alexander Wagner, and participants at the seventh Swiss doctoral workshop in finance (Gerzensee, June 2008) for helpful comments on a preliminary draft of the paper. Special thanks also go to colleagues at the Zürcher Kantonalbank for interesting discussions and feedback. Part of this research has been carried out within the research project on “Credit risk and non-standard sources of risk in finance” led by Rajna Gibson at the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK). The NCCR FINRISK is a research instrument of the Swiss National Science Foundation.|
Purpose – The purpose of this paper is to address the issue of intergenerational and international sharing of longevity and growth risks. Current research on worldwide demographic changes highlights the importance of longevity risk on financial markets and the need to devise optimal hedging vehicles.
Design/methodology/approach – The paper presents a potential financial innovation between two countries at different stages of economic development and with different long-term challenges. This 30-year-long swap is structured in such a way to capture the different timing of needed funds of the two countries and the funding capabilities of each generation: the more developed economy requires funds in the future to cover expenses for its ageing population, while the developing economy needs funds today to pay for educational, technological, and other infrastructural services. To price the swap, the paper applies an exponential-utility-based pricing method and defines an interval of prices allowing a contract to be agreed upon.
Findings – Via the exponential-utility-based pricing method, the paper shows how the bid-ask spread varies with respect to the governments' risk and time preferences.
Originality/value – The paper is believed to be the first to illustrate the structuring and pricing of a long-term longevity swap between two countries at different stages of economic development and to discuss practical challenges derivative structures would face if they were to implement such a strategy.
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