Topic
Embedded option
About: Embedded option is a research topic. Over the lifetime, 372 publications have been published within this topic receiving 4423 citations.
Papers published on a yearly basis
Papers
TL;DR: In this article, the authors analyzed the effect of the bonus policy on the solvency of a unit-linked policy and showed that the typical participating policy can be decomposed into a risk free bond element, a bonus option, and a surrender option.
Abstract: The paper analyzes one of the most common life insurance products — the so-called participating (or with profits) policy. This type of contract stands in contrast to unit-linked (UL) products in that interest is credited to the policy periodically according to some mechanism which smoothes past returns on the life insurance company’s (LIC) assets. As is the case for UL products, the participating policies are typically equipped with an interest rate guarantee and possibly also an option to surrender (sell-back) the policy to the LIC before maturity. The paper shows that the typical participating policy can be decomposed into a risk free bond element, a bonus option, and a surrender option. A dynamic model is constructed in which these elements can be valued separately using contingent claims analysis. The impact of various bonus policies and various levels of the guaranteed interest rate is analyzed numerically. We find that values of participating policies are highly sensitive to the bonus policy, that surrender options can be quite valuable, and that LIC solvency can be quickly jeopardized if earning opportunities deteriorate in a situation where bonus reserves are low and promised returns are high. ©2000 Elsevier Science B.V. All rights reserved.
406 citations
TL;DR: In this article, the authors analyzed the effect of the bonus policy on the solvency of the participating policy and showed that the typical participating policy can be decomposed into a risk free bond element, a bonus option, and a surrender option.
Abstract: The paper analyzes one of the most common life insurance products --the so-called participating (or 'with profits') policy. This type of contract stands in contrast to Unit-Linked (UL) products in that interest is credited to the policy periodically according to some mechanism which smoothes past returns on the life insurance company's (LIC) assets. As is the case for UL products, the participating policies are typically equipped with an interest rate guarantee and possibly also an option to surrender (sell-back) the policy to the LIC before maturity. The paper shows that the typical participating policy can be decomposed into a risk free bond element, a bonus option, and a surrender option. A dynamic model is constructed in which these elements can be valued separately using contingent claims analysis. The impact of various bonus policies and various levels of the guaranteed interest rate is analyzed numerically. We find that values of participating policies are highly sensitive to the bonus policy, that surrender options can be quite valuable, and that LIC solvency can be quickly jeopardized if earning opportunities deteriorate in a situation where bonus reserves are low and promised returns are high.
156 citations
TL;DR: In this paper, the authors explored the pricing aspect of three of the most common product designs: the point-to-point, the cliquet, and the lookback, and presented the pricing formulas in closed form for the three product designs.
Abstract: Equity-indexed annuities have generated a great deal of interest and excitement among both insurers and their customers since they were first introduced to the marketplace in early 1995. Because of the embedded options in these products, the insurers are presented with some challenging mathematical problems when it comes to the pricing and management of equity indexed annuities. This paper explores the pricing aspect of three of the most common product designs: the point-to-point, the cliquet, and the lookback. Based on certain assumptions, we are able to present the pricing formulas in closed form for the three product designs. The method of Esscher transforms is the fundamental tool for pricing such deferred annuities.
131 citations
TL;DR: In this paper, a closed-form, preference-free means of valuing a European call option written on a default-free pure discount bond is provided. But the valuation is restricted to a single class of options.
Abstract: This paper provides a closed-form, preference-free means of valuing a European call option written on a default-free pure discount bond. Investors may not agree upon a theory of the term structure, but they will necessarily agree on equilibrium option values. Further, these equilibrium option values may be obtained without recourse to numerical approximation.Default-free pure discount bond prices were posited to follow a non-standardized transformed Brownian bridge process. This specification implicitly incorporates the terminal constraint that the price of a default-free pure discount bond equal its face value at maturity.Contingent claim valuation necessarily involves consideration of terminal constraints on the value of financial securities. The Brownian bridge specification permits an appropriate means of incorporating a number of such constraints. Therefore, while this paper has considered only the application of the Brownian bridge process to the valuation of debt options, the introduction of this process may provide for many further financial applications.
110 citations
TL;DR: This paper constructed a binomial interest rate tree that models the random evolution offuture interest rates and used the volatility-dependent one-period forward rates produced by this tree to discount the cash flows of any bond in order to arive at bond value.
Abstract: To value such a bond, one must consider the volatility of interest rates, as their volatility will affect the possibility of the call option being exercised One can do so by constructing a binomial interest rate tree that models the random evolution offuture interest rates. The volatility-dependent one-periodforward rates produced by this tree can be used to discount the cash flows of any bond in order to arive at bond value.
100 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2025 | 1 |
| 2023 | 7 |
| 2022 | 10 |
| 2021 | 3 |
| 2020 | 7 |
| 2019 | 5 |