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An Analytic Solution for Valuing Guaranteed Equity Securities

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  • Lee, David

Abstract

Equity-linked securities with a guaranteed amount have some specific interesting features for investors, like downside protection and capital appreciation. The contract has a guaranteed return plus a payment linked to the performance of a basket of equities or indices averaged over a certain period. This article presents an analytical model for valuing equity-linked notes and computing the corresponding hedge ratios. The model appears to be accurate over a wide range of valuation parameters based on numerical studies. Finally, we use the model to value a segregated fund with a guarantee amount at maturity.

Suggested Citation

  • Lee, David, 2023. "An Analytic Solution for Valuing Guaranteed Equity Securities," MPRA Paper 117775, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117775
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    File URL: https://mpra.ub.uni-muenchen.de/117775/1/EquityLinkedNote.pdf
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    References listed on IDEAS

    as
    1. Kirkby, J. Lars & Nguyen, Duy, 2021. "Equity-linked Guaranteed Minimum Death Benefits with dollar cost averaging," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 408-428.
    2. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
    3. Wang, Yayun & Zhang, Zhimin & Yu, Wenguang, 2021. "Pricing equity-linked death benefits by complex Fourier series expansion in a regime-switching jump diffusion model," Applied Mathematics and Computation, Elsevier, vol. 399(C).
    4. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2012. "Valuing equity-linked death benefits and other contingent options: A discounted density approach," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 73-92.
    5. Serena Tiong, 2000. "Valuing Equity-Indexed Annuities," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(4), pages 149-163.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Equity-linked securities; segregated fund; asset pricing; derivative valuation; hedge ratio.;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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