The Risk Management of Minimum Return Guarantees

Contracts paying a guaranteed minimum rate of return and a fraction of a positive excess rate, which is specified relative to a benchmark portfolio, are closely related to unit-linked life-insurance products and can be considered as alternatives to direct investment in the underlying benchmark. They contain an embedded power option, and the key issue is the tractable and realistic hedging of this option, in order to rigorously justify valuation by arbitrage arguments and prevent the guarantees from becoming uncontrollable liabilities to the issuer. We show how to determine the contract parameters conservatively and implement robust risk-management strategies.

Integrating Pricing and Inventory Control: Is it Worth the Effort?

In this paper we first show that the gains achievable by integrating pricing and inventory control are usually small for classical demand functions. We then introduce reference price models and demonstrate that for this class of demand functions the benefits of integration with inventory control are substantially increased due to the price dynamics. We also provide some analytical results for this more complex model. We thus conclude that integrated pricing/inventory models could repeat the success of revenue management in practice if reference price effects are included in the demand model and the properties of this new model are better understood.