Solvency

  • Mario V. Wüthrich
  • Michael Merz
Part of the Springer Finance book series (FINANCE)

Abstract

In this chapter we merge all available financial positions to the full balance sheet approach. To avoid inconsistencies it is crucial that the same state price deflator (and valuation method) is applied to all financial positions of the balance sheet. The solvency consideration then adds a dynamic component to the problem, namely, it considers the question whether the values of the liabilities are covered by asset values also in one year’s time from today. We start this chapter by introducing risk measures that analyze the dynamic question under stress scenarios. Then we define the notions of solvency and acceptability which are supplemented by many examples in asset-and-liability management. We discuss the limited liability option of shareholders, provide insight on dividend payment rules. We analyze hedging financial risk with the Margrabe option and we discuss portfolio optimization under solvency constraints.

Keywords

Risk Measure Price Process Business Plan Accounting Condition Asset Allocation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Mario V. Wüthrich
    • 1
  • Michael Merz
    • 2
  1. 1.RiskLab, Department of MathematicsETH ZurichZurichSwitzerland
  2. 2.Faculty for Economic and Social Studies, Department of Business AdministrationUniversity of HamburgHamburgGermany

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