Valuation of Guaranteed Annuity Conversion Options

Posted: 8 Nov 2005

See all articles by Laura Ballotta

Laura Ballotta

Sir John Cass Business School - City, University of London

Steven Haberman

City University London - Faculty of Actuarial Science

Abstract

In this note we introduce a theoretical model for the pricing and valuation of guaranteed annuity conversion options associated with certain deferred annuity pension-type contracts in the UK.

The valuation approach is based on the similarity between the payoff structure of the contract and a call option written on a coupon-bearing bond; the model makes use of a one-factor Heath-Jarrow-Morton framework for the term structure of interest rates. Numerical results are investigated and the sensitivity of the price of the option to changes in the key parameters is also analyzed.

Keywords: Guaranteed annuity option, Heath-Jarrow-Morton model, Risk-neutral valuation

JEL Classification: G13, G23

Suggested Citation

Ballotta, Laura and Haberman, Steven, Valuation of Guaranteed Annuity Conversion Options. Insurance: Mathematics and Economics, Vol. 33, pp. 87-108, 2003; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=841472

Laura Ballotta (Contact Author)

Sir John Cass Business School - City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.city.ac.uk/people/academics/laura-ballotta

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

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