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The Journal of Fixed Income

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Primary Article

An Analysis of Portfolios of Insured Debts

Michel Gendron, Van Son Lai and Issouf Soumaré
The Journal of Fixed Income Summer 2006, 16 (1) 55-64; DOI: https://doi.org/10.3905/jfi.2006.640277
Michel Gendron
Professor of finance at Laval University in Quebec, Canada.
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  • For correspondence: michel.gendron@fas.ulaval.ca
Van Son Lai
Professor of finance at Laval University in Quebec, Canada.
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  • For correspondence: vanson.lai@fas.ulaval.ca
Issouf Soumaré
An assistant professor of finance at Laval University in Quebec, Canada.
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  • For correspondence: issouf.soumare@fsa.ulaval.ca
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Abstract

This article analyzes multi-year risk management decisions in portfolios of insured debts or credit insurance. This is done by investigating risk reduction through portfolio diversification, increased insuring capacity and changes in contracts maturities. We propose a contingent-claims model that includes many realistic features such as coupon payments, stochastic interest rate and stochastic cash flows volatility. We distinguish between two types of portfolios: ‘closed’ and ‘opened’. We find that for a given riskiness level of insurer's capital, an optimal value of credit insurance can be obtained by appropriate risk diversification and/or increased insurer's capital. Our simulation results show that for insurers with high risk exposure, portfolio risk diversification is more effective than increasing insuring capacity. For a creditworthy insurer, increasing the size of the insurer’s capital can lead to significant improvement in the value of the credit insurance portfolio. This suggests that alternative risk transfer techniques, which provide synthetic (or contingent) capital to the insurer, should be considered in an integrated risk management.

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The Journal of Fixed Income
Vol. 16, Issue 1
Summer 2006
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An Analysis of Portfolios of Insured Debts
Michel Gendron, Van Son Lai, Issouf Soumaré
The Journal of Fixed Income Jun 2006, 16 (1) 55-64; DOI: 10.3905/jfi.2006.640277

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An Analysis of Portfolios of Insured Debts
Michel Gendron, Van Son Lai, Issouf Soumaré
The Journal of Fixed Income Jun 2006, 16 (1) 55-64; DOI: 10.3905/jfi.2006.640277
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