In a market where a stochastic interest rate component characterizes asset dynamics, we propose a flexible lattice framework to evaluate and manage options on equities paying discrete dividends and variable annuities presenting some provisions, like a guaranteed minimum withdrawal benefit. The framework is flexible in that it allows to combine financial and demographic risk, to embed in the contract early exercise features, and to choose the dynamics for interest rates and traded assets. A computational problem arises when each dividend (when valuing an option) or withdrawal (when valuing a variable annuity) is paid, because the lattice lacks its recombining structure. The proposed model overcomes this problem associating with each node of the lattice a set of representative values of the underlying asset (when valuing an option) or of the personal sub-account (when valuing a variable annuity) chosen among all the possible ones realized at that node. Extensive numerical experiments confirm the model accuracy and efficiency.

A flexible lattice framework for valuing options on assets paying discrete dividends and variable annuities embedding GMWB riders

Paolo De Angelis;Emilio Russo
2022

Abstract

In a market where a stochastic interest rate component characterizes asset dynamics, we propose a flexible lattice framework to evaluate and manage options on equities paying discrete dividends and variable annuities presenting some provisions, like a guaranteed minimum withdrawal benefit. The framework is flexible in that it allows to combine financial and demographic risk, to embed in the contract early exercise features, and to choose the dynamics for interest rates and traded assets. A computational problem arises when each dividend (when valuing an option) or withdrawal (when valuing a variable annuity) is paid, because the lattice lacks its recombining structure. The proposed model overcomes this problem associating with each node of the lattice a set of representative values of the underlying asset (when valuing an option) or of the personal sub-account (when valuing a variable annuity) chosen among all the possible ones realized at that node. Extensive numerical experiments confirm the model accuracy and efficiency.
Binomial algorithm, bivariate lattice, discrete dividends, variable annuity, guaranteed minimum withdrawal benefit, surrender option.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/20.500.11770/332560
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