Goldman Sachs Launches Tradeable Index for Longevity and Mortality Risks

This is a finance blog with a penchant for interesting financial market events so rather than focussing on the rather mundane elements of retail insurance brokerage/ financial planning industry, I thought I'll point you towards an article from Business wire. Goldman Sach launched an index in December 2007 which attempts to benchmark a representative population group's mortality and longevity risk.

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Link to the index: Qxx-index

From the index site:

QxX.LS index swaps are designed to allow market participants to hedge or gain exposure to longevity and mortality risks, providing reliable, real-time pricing information and execution

Yes, that's right, folks. You can now trade your way to wealth and riches by betting on when the market is wrong on assessing death rates in the population!

Longevity and mortality are the risks that realized lifespan differs from expected lifespan, creating an economic consequence, often a price change in an asset or liability.

Here's the useful bit in what kind of risks your typical insurance provider holds:

Holders of mortality risk -- typically institutions such as insurance carriers and reinsurers -- are economically exposed to a decrease in the lifespan of a pool of individuals

Holders of longevity risk -- pension funds, annuity writers, the social security trust fund or life settlement investors -- are exposed to the increase in the lifespan of a pool of individuals

Hang on, let me get my head around this:

Insurance companies face more risk if the population lifespan is FALLING. Therefore, it is in their interests to KEEP US HEALTHY AND ALIVE on this planet.

Pension funds and Social Security trust funds, (that includes Singapore's Central Provident Fund and Australia's Superannuation Funds) face GREATER RISK if the population's longevity is RISNG.

Does that mean its a good time to invest in general insurance companies like Warren Buffett did considering that we are all living longer?

How NOT to trade equity warrants.

Last year, I made money and lost it again trading warrants. I was up $7000 in May, and in the months following the sub-prime crisis, saw my profits erode to nothing. 

At the start of the year, I had already formed an idea of which sectors were in play. For Singapore in 2007, it was all about the IR industry, the property markets and the financial sector - specifically the banks. 

I was fixated on this sectors and never went around to look at other companies. I was sure that these companies would report good earnings because the economic indicators and numbers looked good. Logically for me the best bet would be to go long on these stocks. 

The earnings report were good. But being right does not guarantee profit. 

(Stock prices are not a function of earnings alone, they're also a function of public perception of risk. People attach risk premiums to the risk-free rate of return and discount future earnings by a larger amount. Stock prices fall, system wide, when people perceive increased risk in the economy. that's why sub-prime crisis is such a bummer.) 

On warrants:

1. As expiry nears, if the warrants weren't in-or-near-the-money already, then there's little chance for the warrants fair value price to move. Let it go if it doesn't fly.

2. Before buying a warrant, draw a timeline, figure out when the company will report earnings. Where possible model for Dividend effect and Earnings effect. As you draw nearer to that date, watch the warrants very carefully. 

3. If warrants go down by 10%, exit position ASAP. Don't average down no matter how far away the date to expiry is.

On Trading:

1. Never trade with money you can't afford to lose.

2. Take small losses early. 

3. Have a trading system. Back Test. Position size. And Keep good records.

4. Write down your Entry and Exit plan and stick to it.

5. Consistency is the key to Profits.

DIY Portfolio Analysis

Had a poke around the net and found this company, Structured Data LLC, based out of NY. They have a website riskamp.com 

They offer a free excel spreadsheet which allows you to model a portfolio. You do have to download their monte carlo excel add-in to use the spreadsheet.

The idea behind a Monte Carlo analysis is to model the results of a portfolio (can be actual or theoretical) by subjecting it to n random trials. You can then extrapolate the probability distribution functions, mean returns and figure out if you're committing too much or too little of your money into equity, bonds or money markets.