# Economic Neutral Position: How to best replicate not fully replicable liabilities

## TL;DR

This paper develops a generalized approach to determine risk-minimal asset allocation for liabilities involving non-hedgeable claims, enabling better capital requirement modularization based on claim and asset return distributions.

## Contribution

It introduces a generalized Gram-Charlier series for dependent variables, providing a model-independent approximation for risk-minimal asset allocation in complex liabilities.

## Key findings

- Provides a stable approximation for risk-minimal asset allocation
- Enables modularization of capital requirements into market and non-hedgeable risks
- Offers a practical method for handling non-fully replicable liabilities

## Abstract

Financial undertakings often have to deal with liabilities of the form 'non-hedgeable claim size times value of a tradeable asset', e.g. foreign property insurance claims times fx rates. Which strategy to invest in the tradeable asset is risk minimal? We generalize the Gram-Charlier series for the sum of two dependent random variable, which allows us to expand the capital requirements based on value-at-risk and expected shortfall. We derive a stable and fairly model independent approximation of the risk minimal asset allocation in terms of the claim size distribution and the moments of asset return. The results enable a correct and easy-to-implement modularization of capital requirements into a market risk and a non-hedgeable risk component.