Mathematics Colloquium — Special Lecture
Spring 2012
Runhuan Feng
University of Wisconsin, Milwaukee
Modeling Investment Guarantees:
From Asian option To Titanic option
Over the past three decades, the challenge of pricing exotic options such as Asian option in the financial market has inspired theorists and practitioners to pursue innovative techniques. Among many technological breakthroughs on this subject, the work by Marc Yor and co-authors has led to the study of exponential functional of geometric Brownian motion and its integral.
Around the same time the insurance market has also experienced dramatic shift from traditional life products to investment-combined products. In order to compete with mutual funds, nearly all major variable annuity writers offer various forms of investment guarantees, nicknamed by some as Titanic options. Although there is no apparent resemblance in the payoffs of Titanic option and Asian option, we found that the analysis on the integral of geometric Brownian motion can be extended to determine risk measures for variable annuity guarantees, which were only known previously by Monte Carlo simulations. In this work, we present for the first time in the actuarial literature a very efficient and accurate analytical approach to determine risk capitals as an alternative to the current market practice of Monte Carlo simulations.
The talk will provide an introduction to Asian option, variable annuity guaranteed benefits as well as basics of risk measures. It should be easily accessible to students who have taken MATH 476 or MATH 567.