Techniques for market-consistent valuation of contingent claims
Document ID: 2009-1360 (previously 63)
Published on: 15th May 2009
An once-in-a-lifetime change to actuarial valuation practice is about to take place with the adoption of market-consistent valuation methods. The implementation of the new thinking presents some significant challenges for actuaries and accountants.
There appears to be an emerging consensus that ‘state price deflators’ can be developed into a viable tool for valuation purposes. It seems surprising that actuaries appear to be preparing to adopt an approach which is radically different to conventional pricing practice. Risk-neutral methods present a far more efficient means of implementing valuation calculations than deflator techniques and should not be discarded lightly. We argue that the arguments in favour of deflators do not stand up to scrutiny.
