Related papers: Valuation of capital protection options
There is a vast literature on numerical valuation of exotic options using Monte Carlo, binomial and trinomial trees, and finite difference methods. When transition density of the underlying asset or its moments are known in closed form, it…
A variable annuity contract with Guaranteed Minimum Withdrawal Benefit (GMWB) promises to return the entire initial investment through cash withdrawals during the policy life plus the remaining account balance at maturity, regardless of the…
We propose a new `hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated…
Constant Proportion Portfolio Insurance (CPPI) is a strategy designed to give participation in a risky asset while protecting the invested capital. Some gap risk due to extreme events is often kept by the issuer of the product: a put option…
Utility based methods provide a very general theoretically consistent approach to pricing and hedging of securities in incomplete financial markets. Solving problems in the utility based framework typically involves dynamic programming,…
Barrier options are one of the most widely traded exotic options on stock exchanges. In this paper, we develop a new stochastic simulation method for pricing barrier options and estimating the corresponding execution probabilities. We show…
We combine the one-dimensional Monte Carlo simulation and the semi-analytical one-dimensional heat potential method to design an efficient technique for pricing barrier options on assets with correlated stochastic volatility. Our approach…
In this paper, we review pricing of variable annuity living and death guarantees offered to retail investors in many countries. Investors purchase these products to take advantage of market growth and protect savings. We present pricing of…
This paper introduces a novel methodology for the pricing and management of share buyback contracts, overcoming the limitations of traditional optimal control methods, which frequently encounter difficulties with high-dimensional state…
Portfolio optimization methods suffer from a catalogue of known problems, mainly due to the facts that pair correlations of asset returns are unstable, and that extremal risk measures such as maximum drawdown are difficult to predict due to…
In this work, we adapt a Monte Carlo algorithm introduced by Broadie and Glasserman (1997) to price a $\pi$-option. This method is based on the simulated price tree that comes from discretization and replication of possible trajectories of…
In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or…
In this paper we present a numerical valuation of variable annuities with combined Guaranteed Minimum Withdrawal Benefit (GMWB) and Guaranteed Minimum Death Benefit (GMDB) under optimal policyholder behaviour solved as an optimal stochastic…
In the present paper we provide a two-step principal protection strategy obtained by combining a modification of the Constant Proportion Portfolio Insurance (CPPI) algorithm and a classical Option Based Portfolio Insurance (OBPI) mechanism.…
Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder's retirement fund with electable additional guarantees to limit the downside risk of the market. Management fees and guarantee…
Portfolio selection in the periodic investment of securities modeled by a multivariate Merton model with dependent jumps is considered. The optimization framework is designed to maximize expected terminal wealth when portfolio risk is…
We present a simulation-and-regression method for solving dynamic portfolio allocation problems in the presence of general transaction costs, liquidity costs and market impacts. This method extends the classical least squares Monte Carlo…
We consider the holder of an individual tontine retirement account, with maximum and minimum withdrawal amounts (per year) specified. The tontine account holder initiates the account at age 65, and earns mortality credits while alive, but…
Typically options with a path dependent payoff, such as Target Accumulation Redemption Note (TARN), are evaluated by a Monte Carlo method. This paper describes a finite difference scheme for pricing a TARN option. Key steps in the proposed…
Credit value adjustment (CVA) is the charge applied by financial institutions to the counterparty to cover the risk of losses on a counterpart default event. In this paper we estimate such a premium under the Bates stochastic model (Bates…