Relative Guarantees

Snorre Lindset

The Geneva Papers on Risk and Insurance Theory, 2004, vol. 29, issue 2, 187-209

Abstract: Many real-world financial contracts have some sort of minimum rate of return guarantee included. One class of these guarantees is so-called relative guarantees, i.e., guarantees where the minimum guaranteed rate of return is given as a function of the stochastic return on a reference portfolio. These guarantees are the topic of this paper. We analyse a wide range of different functional specifications for the minimum guaranteed rate of return, hereunder both so-called maturity and multi-period guarantees. Several closed form solutions are presented.

Date: 2004
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