“A binomial model for valuing equity-linked policies embedding surrender options”

The computation of the fair periodical premiums for equity-linked policies in a Cox–Ross–Rubinstein (CRR) [Cox, J.C., et al., 1979. Optionpricing: A simplified approach. J. Financial Economics 7, 229–263] evaluation framework is computationally complex. In fact, despite we assumethat the equity value evolves according to a CRR lattice, the dynamics of the reference fund made up of equities of the same kind is describedby a non-recombining tree since, at each contribution date, a constant contribution is added to the fund value. We propose to overcome thisproblem by selecting representative values among all the effective reference fund values. Then, the fair periodical premiums for equity-linkedpolicies embedding a surrender option and a minimum guarantee are computed following the usual backward-induction scheme coupled withlinear interpolation.