IAI Actuarial Core Principles · Economic Modelling · Valuing benefit guarantees using simulation
A maturity guarantee of Rs 100 is simulated with 5 equally likely, independent fund outcomes at maturity (Rs): 60, 90, 100, 120, 150. Ignoring discounting, what is the estimated expected guarantee cost, where payoff = max(100 - fund, 0)?
The payoffs are 40, 10, 0, 0 and 0, totalling 50. Dividing by 5 simulations gives an expected guarantee cost of Rs 10.
- ARs 10
- BRs 8Correct
- CRs 15
- DRs 40
- Rs 0
Explanation
Payoffs are 40, 10, 0, 0, 0, which total 50. The average is 50/5 = 10, so Rs 10 is the cost and option 1 is wrong... check: mean = 10. Rs 8 is therefore incorrect; the key is Rs 10.
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