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The Equity Indexed Annuity: A Monte Carlo Forensic Investigation into a Controversial Financial Product
Author(s) -
Carver Andrew B.
Publication year - 2013
Publication title -
decision sciences journal of innovative education
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.52
H-Index - 19
eISSN - 1540-4609
pISSN - 1540-4595
DOI - 10.1111/j.1540-4609.2012.00365.x
Subject(s) - monte carlo method , equity (law) , computer science , annuity , actuarial science , econometrics , economics , finance , mathematics , statistics , life annuity , pension , political science , law
Equity Indexed Annuities (EIAs) are controversial financial products because the payoffs to investors are based on formulas that are supposedly too complex for average investors to understand. This brief describes how Monte Carlo simulation can provide insight into the true risk and return of an EIA. This approach can be used as a project assignment or an in‐class assignment to demonstrate the ability of Monte Carlo simulation to solve problems involving uncertainty and nonlinear payoffs.