aDipartimento di Scienze Aziendali, Università della Calabria, Ponte Bucci, Cubo 3C, 87036 Rende (CS), Italy;bDipartimento di Finanza dell’Impresa e dei Mercati Finanziari, Università di Udine, Via Tomadini 30/A, 33100 Udine, Italy
Abstract:
We tackle the problem of computing fair periodical premiums of an equity-linked policy with a maturity guarantee and an embedded surrender option. We consider the policy as a Bermudan-style contingent claim that can be exercised at the premium payment dates. The evaluation framework is based on a discretization of a bivariate model that considers the joint evolution of the equity value with stochastic interest rates. To deeply reduce the computational complexity of the pricing problem we use the singular points framework that allows us to compute accurate upper and lower estimates of the policy premiums.