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Valuation of Guaranteed Contracts Set Relative to Cross‐currency Stochastic Rates of Return
Author(s) -
Hsieh TsungYu,
Chou ChiHsun,
Chen SonNan
Publication year - 2014
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12059
Subject(s) - valuation (finance) , currency , economics , actuarial science , rate of return , bond , financial economics , econometrics , monetary economics , finance
We derive the pricing formulas for guaranteed contracts with guaranteed minimum rates of return linked to cross‐currency stochastic rates of return under a cross‐currency framework. These rates are often embedded in contracts such as life and pension insurance policies, guaranteed investment contracts, and index‐linked bonds. Valuation of such contracts has not been investigated in the previous literature. Our research finds that the past valuation of these rates via a single‐currency framework causes significant underestimation under both maturity and (especially) multi‐period guarantees. Our pricing formulas are more suitable, tractable, and feasible in practice than those in the previous literature.