Insurance Liabilities and Option Prices. A case study in market-consistent model calibration. Andrew Smith 8 September 2004 [email protected] Agenda. Example product – guaranteed annuity options Swaps and swaptions
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Source: Royal Bank of Scotland
A fitted model usually produces a smoother surface, described by a small number of parameters, and so does not capture all swaption prices. The reason for building this model is to price GAOs.
Source: Bootstrap of swaption data
Its more costly to guarantee a higher rate – but the shape of the curve (“smile”) is a chosen assumption, as only observed vols are at the money.
Spot yield @ 30/06/2004
Source: intercapital / datastream and DMO
Largest increase in GAO cost (as % swap based value) is for short dated out-of-the -money options.