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Index-based swap

\ˈɪndɛks\-\beɪst\ \swɑp\

An index-based swap is a type of longevity swap that uses the experience of a standard ‘index’ population to determine the ‘actual’ mortality rates.

This type of swap is designed to hedge the trend risk for a population, which tends to make up the majority of longevity risk for large pension plans. Such a swap has the potential to be provided on standard terms, opening up the possibility of a tradable longevity market, external capital investment and swap contracts for shorter periods. A number of approaches have been suggested for removing possible basis risk using index-based swaps, including providing indices for different socio-economic groups and tailoring the swap to reflect the make-up of the actual population.

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