European Business Schools Librarian's Group
Finance Research Group Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No F-2007-02: Pricing the Option to Surrender in Incomplete Markets
Andrea Consiglio () and Domenico De Giovanni ()
Additional contact information
Andrea Consiglio: Department of Statistics and Mathematics “Silvio Vianelli”, University of Palermo,, Postal: University of Palermo,, Italy
Domenico De Giovanni: Department of Business Studies, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: 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
Keywords: Life insurance; Policies with minimum guarantee; Option pricing; Incomplete markets; Surrender options
34 pages, October 31, 2007
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F_2007_02.pdf
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