A model for pricing rate of return guarantees on an investment

Abstract

Investment contracts that embed minimum guarantees have attracted researchers as they are increasingly becoming popular because of the high economic value associated with them. In this mini-thesis we examine the approaches of Brennan and Schwartz (1976) and Miltersen and Persson (1999) for valuing such guarantees. The former approach considers the case of a deterministic interest rate and the latter examines pricing of rate of return guarantees on the stock return process and short term interest rate process. They also consider the case when interest rates are stochastic. We conclude with an approach that we have proposed for obtaining a minimum guarantee price for a given minimum guaranteed benefit. The data analysis is presented by means of tables and graphs. The results generated in the tables and graphs were based on Matlab programming language, Hahn (2002), listed in the appendices and Maple programming language, Cyganowski, Kloeden and Ombach (2002).