Pricing the Option to Surrender in Incomplete Markets
AbstractNew international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black and Scholes paradigm are often used; however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option. Copyright (c) The Journal of Risk and Insurance, 2010.
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Bibliographic InfoArticle provided by The American Risk and Insurance Association in its journal Journal of Risk and Insurance.
Volume (Year): 77 (2010)
Issue (Month): 4 ()
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Other versions of this item:
- Consiglio, Andrea & De Giovanni, Domenico, 2007. "Pricing the Option to Surrender in Incomplete Markets," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2007-02, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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