I'm not sure if this truly belongs in quantitative finance, but as an actuary, I can't resist responding. The answer to your question literally fills thousands of pages of regulations, research papers, best-practice articles, and study materials. Pension funds are VERY exotic options. They're not just puts. They're puts tied to mortality, employee behavior, ...


An interest rate swap can be regarded a combination of a floating-rate and a fixed-rate bond, with off-setting notionals: Pay-fixed IRS: we are short the fixed-coupon bond and received the variable-coupon bond. Since floating-rate bonds have very low duration (i.e. low sensitivity to changes in rates), being paid IRS means being short duration. Receive-...


Here is another application. Suppose, an insurance company faces a wave of unexpected policy claims and issues floating-rate bonds to cover these claims. To reconcile the floating-rate receivables and fixed-rate payables, it purchases IR swaps.

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