Qipin He - MSc Defence

Pricing and Dynamic Hedging of Segregated Fund Guarantees

Abstract :

Guaranteed minimum maturity benefit and guaranteed minimum death benefit offered by a single premium segregated fund contract are priced. A dynamic hedging approach is used to determine the value of these guarantees. Cash flow projections are used to analyze the loss or profit to the insurance company. Optimally exercised reset options are priced by the Crank-Nicolson method. Reset options, assuming they are exercised only when the funds exceed a given threshold, are priced using simulations. Finally, we study the distribution of the loss or profit for segregated funds with reset option under a dynamic hedging strategy with an allowance for transaction costs.