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. Pric- ing techniques based on the Black & 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
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Bibliographic InfoPaper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2007-02.
Length: 34 pages
Date of creation: 31 Oct 2007
Date of revision:
Contact details of provider:
Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
More information through EDIRC
Life insurance; Policies with minimum guarantee; Option pricing; Incomplete markets; Surrender options;
Other versions of this item:
- Andrea Consiglio & Domenico De Giovanni, 2010. "Pricing the Option to Surrender in Incomplete Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 935-957.
- NEP-ALL-2008-03-08 (All new papers)
- NEP-IAS-2008-03-08 (Insurance Economics)
- NEP-MKT-2008-03-08 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Working Papers on Finance
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