Consider a pension plan invested in risky assets to meet future pension obligations. Define a hypothetical insurance policy ("put option") which pays off the amount necessary to meet the future pension obligations if the risky assets in the plan fail to generate enough value to pay all pension obligations. Define a hypothetical ex post pension sur- plus ("call option") as the value left in the the fund after meeting all pension obligations under circumstances when the fund generates more than enough cash flow to meet all obligations. What does put-call parity say about this? How can the approach of Biggs (footnote 3) be reconciled with the deficit numbers of Novy-Marx and Rauh mentioned in the same paragraph?

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Pension Plans PutCall Parity and Reconciling Deficit Estimates Heres a breakdown of the concepts and how they might relate Pension Plan with Risky Ass... View the full answer