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Pricing of guaranteed annuity conversion options.

Ballotta, L. and Haberman, S. (2003). Pricing of guaranteed annuity conversion options.. INSURANCE MATHEMATICS & ECONOMICS, 33(1), pp. 87-108.

Abstract

In this note we introduce a theoretical model for the pricing and valuation of guaranteed annuity conversion options associated with certain deferred annuity pension-type contracts in the UK. The valuation approach is based on the similarity between the payoff structure of the contract and a call option written on a coupon-bearing bond. The model makes use of a one-factor Heath-Jarrow-Morton framework for the term structure of interest rates. Numerical results are investigated and the sensitivity of the price of the option to changes in the
key parameters is also analyzed.

Publication Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in INSURANCE MATHEMATICS & ECONOMICS. Changes resulting from the publishing process, such as editing, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in INSURANCE MATHEMATICS & ECONOMICS, VOL 33, ISSUE 1, (August 2003) DOI 10.1016/S0167-6687(03)00146-X
Publisher Keywords: guaranteed annuity conversion options, option pricing, one-factor Heath-Jarrow-Morton framework
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/5810
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