Gilts or Swaps?
Document ID: 2004-790 (previously 2004-001)
Published on: 31st July 2004
Author: Craig Turnbull, John Hibbert
Risk-free rates of interest play a prominent role, not just in financial theory, but in the valuation of liabilities and the calculation of prudential capital. The recent move towards a market-consistent (realistic) basis for UK regulatory valuation of insurance liabilities has focussed attention on the choice of instruments used to determine risk-free rates. Traditionally, actuaries have looked to the government bond markets for measures of the risk-free interest rate. By contrast, investment banks generally view the interest rates implied by swap markets as their benchmark for the risk-free rate. This note discusses the relative merits of using gilts and swaps for this task.
