Optimal design of profit sharing rates by FFT

Donatien Hainaut

Insurance: Mathematics and Economics, 2010, vol. 46, issue 3, 470-478

Abstract: This paper addresses the calculation of a fair profit sharing rate for participating policies with a minimum interest rate guaranteed. The bonus credited to policies depends on the performance of a basket of two assets: a stock and a zero coupon bond and on the guarantee. The dynamics of the instantaneous short rates are driven by a Hull and White model, whereas the stocks follow a double exponential jump-diffusion model. The participation level is determined such that the return retained by the insurer is sufficient to hedge the interest rate guaranteed. Given that the return of the total asset is not lognormal, we rely on a Fast Fourier Transform to compute the fair value of bonus and guarantee options.

Keywords: Policies; with; profit; Fast; Fourier; Transform; Fair; pricing (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:46:y:2010:i:3:p:470-478

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