Longevity Derivatives

AAA

DEFINITION of 'Longevity Derivatives'

A class of securities that provides a hedge against parties that are exposed to longevity risks through their businesses, such as pension plan managers and insurers. These types of derivatives are designed to have increasingly high payouts as a selected population group lives longer than was originally expected or calculated.

The first (and still most prevalent) form of longevity derivatives is the longevity bond (also known as survivor bond), which pays a coupon based on the "survivorship" of a stated population group. As the mortality rate of the stated population group rises, coupon payments drop until eventually reaching zero. The longevity derivatives market has since expanded to include forward contracts, options and swaps.

INVESTOPEDIA EXPLAINS 'Longevity Derivatives'

Speculators choose to acquire longevity risk from companies for several reasons. Many speculators are attracted by the fact that longevity risk has shown very low correlations with other types of investing risks, such as market risk or currency risk. Many institutional investors are attracted to anything that doesn't move lockstep with equity or debt market returns.

Because they are a new class of product (the first longevity bonds were sold in the late 1990s), there are still issues being worked out as to the best way to package longevity derivatives to investors and insurer groups, how to best capture sample populations and how to use leverage most effectively.

RELATED TERMS
  1. Financial Analysis

    The process of evaluating businesses, projects, budgets and other ...
  2. Risk Analysis

    The study of the underlying uncertainty of a given course of ...
  3. Benchmark

    A standard against which the performance of a security, mutual ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Defined-Benefit Plan

    An employer-sponsored retirement plan where employee benefits ...
  6. Derivative

    A security whose price is dependent upon or derived from one ...
Related Articles
  1. Options & Futures

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  2. Active Trading Fundamentals

    Using Logic To Examine Risk

    Know your odds before you put your money on the table.
  3. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  4. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  5. Active Trading Fundamentals

    What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility associated with the ...
  6. Mutual Funds & ETFs

    Are there publicly traded hedge funds?

    See why a privately arranged hedge fund may decide to take its fund public, and how the investing public at large can gain exposure to hedge fund value.
  7. Options & Futures

    What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure to harmful stock movements.
  8. Options & Futures

    What role does intrinsic value play in put options?

    See why the concept of intrinsic value is so important in options trading and how investors use it to evaluate the worth of their options contract.
  9. Mutual Funds & ETFs

    What does a hedge fund do?

    Read how hedge funds differ from other investment vehicles and how their investment strategies make them unique and potentially risky.
  10. Retirement

    What is an equity-indexed annuity?

    Understand what an equity-indexed annuity is, its advantages and disadvantages, and how it differs from other annuity investments.

You May Also Like

Hot Definitions
  1. Trust Fund

    A trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. The ...
  2. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  3. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  4. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  5. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  6. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
Trading Center