Consiglio, Andrea () (Department of Statistics and Mathematics “Silvio Vianelli”, University of Palermo,) De Giovanni, Domenico () (Department of Business Studies, Aarhus School of Business)
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New 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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Paper 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.
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