Description: This paper presents an algorithm for valuing American options in a path simulation model. It demonstrates the accuracy by an example involving a put option on a non-dividend-paying stock for which the exact premium could be determined. It shows how the use of simulation models can be useful in valuing a broker-dealer's derivative book and analyzing the asset-liability condition of financial intermediaries.

Description: Competition for space in distribution channels has resulted in a proliferation of exotic options embedded in variable annuity products. This article discusses how this has created a need which can be addressed, in part, by hedging variable annuity guarantees with long-dated equity derivatives.

Description: In December 2007, Goldman Sachs launched a product called QxX index swap, which is designed to allow market participants to hedge or gain exposure to longevity and mortality risks. This presentation offers a quantitative analysis of this brand new financial innovation. First of all, the presentation sets up a risk-neutral framework to price QxX index swaps. This framework, which is based on the dynamics of death rates under a two-factor stochastic mortality model in a risk-adjusted probability measure, yields prices [spreads] that are fairly close to the spreads that Goldman Sachs currently offers. The presentation then explores the uncertainty involved in this model-based pricing framework. Specifically, it studies parameter risk by using Markov Chain Monte Carlo [MCMC] and model risk by examining structural changes in mortality dynamics. The results indicate that both model risk and parameter risk are significant. Actuaries should therefore be aware of these issues when placing a value on a longevity index swap.

Description: This paper shows that the Esscher transform is also an efficient technique for valuing derivative securities if the logarithms of the prices of the primitive securities are governed by certain stochastic processes with stationary and independent increments. Two applications are presented, the first for valuing a European call option and the second for pricing derivative securities of multiple risky assets.

Description: This paper addresses rainfall insurance using financial derivatives. Usual modeling is done for temperature related products. The authors gathered rainfall data in Mexico City over a period of five decades. This showed that the time series data is stationary and normally distributed. Therefore, the authors applied a closed-form solution to value swaps, calls and puts, with and without limits. The model can be used for practical purpose of pricing rainfall derivatives. From Actuarial Research Clearing House, 2006.

Description: Characteristics of Asian Indexed Executive Options. Presented at August 2011 Actuarial Research Conference.

Description: This paper explains the development of the credit derivative market, describes the most common types of credit derivatives, discusses how insurers can and do use these instruments and explains the role they played in the financial market turmoil of 2008.