Efficient Pricing of Ratchet Equity Indexed Annuities in a VG Economy

Abstract

In this paper we propose a new method for approximating the price of arithmetic Asian options in a VG economy which is then applied to the problem of pricing Equity Indexed Annuity contracts. The proposed procedure is an extension to the case of a VG-based model of the moment-matching method developed by Turnbull and Wakeman (1991) and Levy (1992) for the pricing of this class of path-dependent options in the traditional Black-Scholes setting. The accuracy of the approximation is analysed against RQMC estimates for the case of ratchet Equity Indexed Annuities with index averaging.

Keywords: Asian options, Edgeworth expansion, Equity Indexed Annuities, risk neutral valuation, Randomized Quasi-Monte Carlo, variance reduction techniques

JEL Classification: C63, G13