Valuation of guaranteed annuity conversion options

Ballotta, L. & Haberman, S. (2003). Valuation of guaranteed annuity conversion options. Insurance: Mathematics and Economics, 33(1), pp. 87-108. doi: 10.1016/S0167-6687(03)00146-X

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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.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Insurance: Mathematics and 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 AND ECONOMICS, VOL 33, ISSUE 1, 8th August 2003, DOI:10.1016/S0167-6687(03)00146-X
Uncontrolled Keywords: Guaranteed annuity option; Risk-neutral valuation; Heath–Jarrow–Morton model
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Actuarial Science & Insurance > Faculty of Actuarial Science & Insurance Actuarial Research Reports
Related URLs:
URI: http://openaccess.city.ac.uk/id/eprint/5811

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