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Valuation and analysis on complex equity indexed annuities

Author

Listed:
  • Chiu, Yu-Fen
  • Hsieh, Ming-Hua
  • Tsai, Chenghsien

Abstract

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.

Suggested Citation

  • Chiu, Yu-Fen & Hsieh, Ming-Hua & Tsai, Chenghsien, 2019. "Valuation and analysis on complex equity indexed annuities," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x19301039
    DOI: 10.1016/j.pacfin.2019.101175
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    More about this item

    Keywords

    Equity-indexed annuities; Foreign exchange; Risk-neutral valuation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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