A bivariate model for evaluating equity-linked policies with surrender options

This article proposes a bivariate lattice model for evaluating equity-linked policies embedding a surrenderoption when the underlying equity dynamics is described by a geometric Brownian motion with stochasticinterest rate. The main advantage of the model stays in that the original processes for the reference fundand the interest rate are directly discretized by means of lattice approximations, without resorting to anyadditional transformation. Then, the arising lattices are combined in order to establish a bivariate tree whereequity-linked policy premiums are computed by discounting the policy payoff over the lattice branches, andallowing early exercise at each premium payment date to model the surrender decision.