Pricing of multi-period rate of return guarantees: The Monte Carlo approach ☆

Abstract The uncertain yearly returns on both life and pension insurance policies are often bounded from below by a minimum guaranteed rate of return. It turns out that this yearly, or multi-period guarantee can have a very high economic value. However, because determining this value is a problem of high dimension, obtaining an estimate of it can be rather difficult and time-consuming. In this paper we present a numerical valuation method for estimating the market value of the multi-period guarantee when the uncertainty in the interest rates is modeled in a Heath, Jarrow, and Morton framework with an exponential volatility structure.

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