Sensitivity Analysis of Long-Term Cash Flows

TL;DR

This paper introduces a method for analyzing how long-term cash flows respond to changes in underlying processes, using martingale extraction and combining it with Fournie's approach to simplify sensitivity calculations.

Contribution

It develops a novel framework that simplifies the sensitivity analysis of long-term cash flows by integrating martingale extraction with Fournie's method.

Findings

Sensitivity of long-term cash flows can be expressed in a simple form

The method facilitates easier computation of sensitivities

The approach combines martingale extraction with existing techniques

Abstract

In this article, a sensitivity analysis of long-term cash flows with respect to perturbations in the underlying process is presented. For this purpose, we employ the martingale extraction through which a pricing operator is transformed into what is easier to address. The method of Fournie et al. will be combined with the martingale extraction. We prove that the sensitivity of long-term cash flows can be represented in a simple form.