Valuation and analysis on complex equity indexed annuities
Ming-Hua Hsieh and
Pacific-Basin Finance Journal, 2019, vol. 57, issue C
Equity-indexed annuities (EIAs) are popular products that eliminate the downside risk while still providing upside potential. Among the three major categories of EIAs, ratchet EIAs are the most popular. Ratchet EIAs with quanto features emerge due to differences in asset returns across countries. The literature covers the pricing of the EIAs that are not quantos, and this paper fills the hole. In deriving pricing formulas, we add an exchange rate model as well as a foreign risk-free rate model to the pricing framework of Black and Scholes. Our formulas cover quanto ratchet EIAs for both compound and simple versions that may have a return cap and employ two types of geometric return averaging. The numerical analyses illustrate how contract features and market parameters affect contract values. The results also highlight the significance of quantos in contract pricing.
Keywords: Equity-indexed annuities; Foreign exchange; Risk-neutral valuation (search for similar items in EconPapers)
JEL-codes: G13 G22 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x19301039
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