Optimal design of profit sharing rates by FFT
AbstractThis paper addresses the calculation of a fair profit sharing rate for participating policies with a minimum interest rate guaranteed. The bonus credited to policies depends on the performance of a basket of two assets: a stock and a zero coupon bond and on the guarantee. The dynamics of the instantaneous short rates are driven by a Hull and White model, whereas the stocks follow a double exponential jump-diffusion model. The participation level is determined such that the return retained by the insurer is sufficient to hedge the interest rate guaranteed. Given that the return of the total asset is not lognormal, we rely on a Fast Fourier Transform to compute the fair value of bonus and guarantee options.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 46 (2010)
Issue (Month): 3 (June)
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Web page: http://www.elsevier.com/locate/inca/505554
Policies with profit Fast Fourier Transform Fair pricing;
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01-5, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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