Actuarial Finance

This book focuses on the mathematical models and techniques usedin actuarial finance for the pricing and hedging of actuarialliabilities exposed to financial markets and other contingencies. The classical theory of financial mathematics is discussedwhile covering additional topics of interest for actuaries.Actuarial applications play a pivotal role and actuarial content isintegrated throughout. Specifically, insurance liabilitiesand financial derivatives are described in the first chapters, inaddition to valuation principles that differ in financial andinsurance markets. Classical books in financial mathematics focuson pricing options and futures in absence of arbitrage whereasactuarial finance mainly involves valuation of liabilities tied tofinancial markets and risk management using derivatives. Therefore, this book devotes entire chapters or sections to topicsof greater importance for actuaries such as the management ofmortality risk and other non-tradable risks in the industry;valuation and reserving modern insurance liabilities that involveunderstanding the differences between the real-world andrisk-neutral probability measures; and stochastic interest rates indiscrete- and continuous-time given the long-term nature ofinsurance liabilities. The authors clearly differentiate thereal-world and risk-neutral probability measures and also provideexercises, select solutions, and R data sets for additionallearning.