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Valuation of Equity Linked Securities with Guaranteed Return

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  • David Xiao

Abstract

Equity-linked securities with a guaranteed return become very popular in financial markets ether as investment instruments or life insurance policies. The contract pays off a guaranteed amount plus a payment linked to the performance of a basket of equities averaged over a certain period. This paper presents a new model for valuing equity-linked securities. Our study shows that the security price can be replicated by the sum of the guaranteed amount plus the price of an Asian style option on the basket. Analytical formulas are derived for the security price and corresponding hedge ratios. The model appears to be accurate over a wide range of underlying security parameters according to numerical studies. Finally, we use our model to value a segregated fund with a guarantee at maturity.

Suggested Citation

  • David Xiao, 2023. "Valuation of Equity Linked Securities with Guaranteed Return," Papers 2306.15026, arXiv.org.
    • Handle: RePEc:arx:papers:2306.15026
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    References listed on IDEAS

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    1. Kirkby, J. Lars & Nguyen, Duy, 2021. "Equity-linked Guaranteed Minimum Death Benefits with dollar cost averaging," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 408-428.
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    3. Wang, Yayun & Zhang, Zhimin & Yu, Wenguang, 2021. "Pricing equity-linked death benefits by complex Fourier series expansion in a regime-switching jump diffusion model," Applied Mathematics and Computation, Elsevier, vol. 399(C).
    4. Serena Tiong, 2000. "Valuing Equity-Indexed Annuities," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(4), pages 149-163.
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