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2007

Monte Carlo methods for valuation of ratchet Equity Indexed Annuities

3 years 10 months ago
Monte Carlo methods for valuation of ratchet Equity Indexed Annuities
Equity Indexed Annuities (EIAs) are popular insurance contracts. EIAs provide the insured with a guaranteed accumulation rate on their premium at maturity. In addition, the insured may receive extra benefit if the return of the linked index is high enough. There are a few variations of EIAs. We consider two types of EIAs: compound ratchet and simple ratchet. Under the geometric Brownian motion assumption for the equity index, plain compound ratchet options is known to have closed form solutions, but plain simple ratchet option is not. In this paper, we derive a closed form solution for plain simple ratchet option. For more exotic options, Monte Carlo methods are usually used for their valuation. To improve their efficiency, we propose two control variates based on the analytical solutions for the price of plain ratchet options. The effectiveness of the proposed control variates is examined via numerical examples of a typical contract.
Ming-hua Hsieh, Yu-fen Chiu
Added 02 Oct 2010
Updated 02 Oct 2010
Type Conference
Year 2007
Where WSC
Authors Ming-hua Hsieh, Yu-fen Chiu
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