PRICING PARTICIPATING POLICIES WITH RATE GUARANTEES

2006 ◽  
Vol 09 (04) ◽  
pp. 517-532 ◽  
Author(s):  
CHI CHIU CHU ◽  
YUE KUEN KWOK
Keyword(s):  
Interest Rate ◽  
Default Risk ◽  
Contingent Claims ◽  
Analytic Approximation ◽  
Perturbation Techniques ◽  
Pricing Model ◽  
Investment Portfolio ◽  
Pricing Models ◽  
Approximation Solution ◽  
The Interest Rate

We construct the contingent claims models that price participating policies with rate guarantees and default risk. These policies are characterized by the sharing of profits from an investment portfolio between the insurer and the policyholders. A certain reserve distribution mechanism is employed to credit interest at or above certain specified guaranteed rate periodically to the policyholders. Besides the reversionary reserve distribution, terminal bonus is also paid to the policyholders if the terminal surplus is positive. However, the insurer may default at maturity and the policyholders can only receive the residual assets. By neglecting market frictions, mortality risk and surrender option, and under certain assumptions on the interest rate crediting mechanism, we are able to find analytic approximation solution to the pricing model using perturbation techniques. We also develop effective finite difference algorithms for the numerical solution of the contingent claims models. Pricing behaviors of these participating policies with respect to various parameters in the pricing models are examined.

scholarly journals On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

2018 ◽  
Vol 11 (4) ◽  
pp. 87 ◽  
Author(s):  
Hong-Ming Yin ◽  
Jin Liang ◽  
Yuan Wu
Keyword(s):  
Interest Rate ◽  
Credit Rating ◽  
Corporate Bond ◽  
Bond Pricing ◽  
Stochastic Interest Rate ◽  
Pricing Model ◽  
New Model ◽  
Stochastic Interest ◽  
The Interest Rate ◽  
Rating Change

In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek’s stochastic process. Calibration of the model parameters and some numerical calculations are shown.

scholarly journals VALUATION OF GUARANTEED ANNUITY OPTIONS IN AFFINE TERM STRUCTURE MODELS

2007 ◽  
Vol 10 (02) ◽  
pp. 363-387 ◽  
Author(s):  
CHI CHIU CHU ◽  
YUE KUEN KWOK
Keyword(s):  
Interest Rate ◽  
Term Structure ◽  
Analytic Approximation ◽  
Approximation Methods ◽  
Term Structure Model ◽  
Stochastic Duration ◽  
Payoff Structure ◽  
Interest Rate Term Structure ◽  
The Interest Rate ◽  
The One

We propose three analytic approximation methods for numerical valuation of the guaranteed annuity options in deferred annuity pension policies. The approximation methods include the stochastic duration approach, Edgeworth expansion, and analytic approximation in affine diffusions. The payoff structure in the annuity policies is similar to a quanto call option written on a coupon-bearing bond. To circumvent the limitations of the one-factor interest rate model, we model the interest rate dynamics by a two-factor affine interest rate term structure model. The numerical accuracy and the computational efficiency of these approximation methods are analyzed. We also investigate the value sensitivity of the guaranteed annuity option with respect to different parameters in the pricing model.

A TWO-FACTOR JUMP-DIFFUSION MODEL FOR PRICING CONVERTIBLE BONDS WITH DEFAULT RISK

2016 ◽  
Vol 19 (06) ◽  
pp. 1650046 ◽  
Author(s):  
RADHA KRISHN COONJOBEHARRY ◽  
DÉSIRÉ YANNICK TANGMAN ◽  
MUDDUN BHURUTH
Keyword(s):  
Interest Rate ◽  
Default Risk ◽  
Stock Price ◽  
Numerical Experiments ◽  
Diffusion Processes ◽  
Jump Diffusion ◽  
Convertible Bonds ◽  
Minor Effect ◽  
Jump Diffusion Model ◽  
The Interest Rate

The current literature on convertible bonds (CBs) comprises only models where the stock price and the interest rate are governed by pure-diffusion processes. This paper fills a gap by developing and implementing a two-factor model where both underlying factors follow jump-diffusion processes, and which also incorporates default risk. We derive the partial integro-differential equation satisfied by the CB price in our model, and solve it by a spectral method based on Chebyshev discretizations and Clenshaw–Curtis quadratures. The conversion, call, and put constraints give rise to a linear complementarity problem, which is solved by an operator-splitting (OS) method. Through numerical experiments, we investigate the effects that the various parameters have on the CB price. In particular, our numerical experiments show that jumps in the stock price have a significant impact on the CB price, while jumps in the interest rate tend to have a minor effect on the price. In general, the dynamics of the stock price have more impact in pricing the CB than the dynamics of the interest rate.

scholarly journals Asset Pricing Model (CAPM) in Emerging Markets: Evidence in BRICS nations and comparisons with other G20

2019 ◽  
Vol 11 (2) ◽  
pp. 162-175
Author(s):  
Cláudio Francisco Rezende ◽  
Vinícius Silva Pereira ◽  
Antonio Sergio Torres Penedo
Keyword(s):  
Asset Pricing ◽  
Interest Rate ◽  
Risk Premium ◽  
Fixed Effects ◽  
Interest Rate Risk ◽  
Pricing Model ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Rate Risk ◽  
The Interest Rate

The objective of this paper is to empirically investigate the applicability of the asset pricing model in a portfolio made up of groups of countries, the G20 for this case. In the meantime, it was intended to compare a complete sample of 14 constituent countries of the group, a subsample of four countries belonging to the BRICS and another of the countries that do not belong. The survey sample consisted of long-term interest rate data from these countries collected in the OECD database and also from the Central Bank of Brazil (Bacen). Based on the results of the regression of Panel data on fixed effects, we found evidence that there is a statistically positive relationship between the market risk premium and the interest rate risk premiums. The regression betas showed that the interest rate risk premium is not sensitive when considering the full sample of the G20 countries but is sensitive in the BRICS sample.

Emerging Markets Interest Rates, International Reserves and Net Foreign Assets

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Joseph Bitar ◽  
Martin Boileau
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Risk Premium ◽  
Default Risk ◽  
International Reserves ◽  
Net Foreign Assets ◽  
Portfolio Balance ◽  
The Interest Rate ◽  
Interest Differential ◽  
Foreign Assets

Abstract In the context of a managed float regime, we adopt the portfolio balance view to show the effects of the net foreign assets of an economy and its gross international reserves level on interest rate differentials. We argue that the interest rate differential can be explained by three components, where the components are the expected depreciation of the domestic currency, a default risk premium, and a portfolio balance premium. Our theoretical analysis suggests that the interest differential is a convex function of the level of gross international reserves. In particular, the differential and gross reserves are inversely related at low levels of reserves, but positively at higher levels. We evaluate our framework for the case of Lebanon. We find that the differential is inversely related to both net foreign assets and gross international reserves. These findings are then confirmed with data from Indonesia and Mexico.

scholarly journals Pricing model of interest rate swap with a bilateral default risk

2010 ◽  
Vol 234 (2) ◽  
pp. 512-517 ◽  
Author(s):  
Xiaofeng Yang ◽  
Jinping Yu ◽  
Shenghong Li ◽  
Albert Jerry Cristoforo ◽  
Xiaohu Yang
Keyword(s):  
Interest Rate ◽  
Default Risk ◽  
Pricing Model ◽  
Interest Rate Swap ◽  
Rate Swap

scholarly journals The Pricing of Double Trigger Catastrophe Put Option with Default Risk

2020 ◽  
pp. 38-50
Author(s):  
Linzhi Jiao ◽  
Zhenhua Bao
Keyword(s):  
Numerical Analysis ◽  
Option Pricing ◽  
Default Risk ◽  
Rate Process ◽  
Pricing Model ◽  
Put Option ◽  
Option Pricing Model ◽  
The Interest Rate ◽  
Value Changes ◽  
Coupon Bond

This study was present a catastrophe put option pricing model that considers default risk. The default of the option issuer can occur at any time before the maturity, and there is a correlation between the total assets of the option issuer, the underlying stock and the zero coupon bond. The explicit solution of option pricing is obtained when the interest rate process follows the Vasicek model and relevant proofs are given. Finally, the value changes under different parameters are discussed through a numerical analysis.

Sign in / Sign up

Export Citation Format

Share Document