Robust Hedging of Withdrawal Guarantees (Extended Version)

TL;DR

This paper develops a robust hedging strategy for withdrawal guarantees in fund investments, providing closed-form solutions for guarantee valuation to manage risks effectively.

Contribution

It introduces a novel robust hedging approach for withdrawal guarantees with explicit formulas for valuation, enhancing risk management in financial products.

Findings

Closed-form solutions for guarantee valuation

Effective hedging strategies under uncertainty

Improved risk management for withdrawal guarantees

Abstract

Withdrawal guarantees ensure the periodical deduction of a constant dollar-amount from a fund investment for a fixed number of periods. If the fund depletes before the last withdrawal, the guarantor has to finance the outstanding withdrawals. We derive a robust hedging strategy which leads to closed form solutions for the guarantee value.