Skip to content

IAI Actuarial Core Principles · Economic Modelling · Valuing benefit guarantees using simulation

A Monte Carlo estimate of a put-style maturity guarantee uses 10,000 paths. The mean discounted payoff is Rs 12 and the sample standard deviation of the discounted payoffs is Rs 30. What is the approximate 95% confidence interval for the true cost (use 1.96)?

The standard error is 30 divided by 100, which is 0.3. Multiplying by 1.96 gives a half-width of 0.588, so the interval is Rs 12 plus or minus 0.588.

  1. ARs 12 ± 0.588Correct
  2. BRs 12 ± 5.88
  3. CRs 12 ± 58.8
  4. DRs 12 ± 0.3
  5. Rs 12 ± 1.96

Explanation

Standard error = 30/sqrt(10000) = 0.3. The 95% half-width = 1.96 × 0.3 = 0.588. Using the standard deviation without dividing by the square root of N gives 58.8, which is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Valuing benefit guarantees using simulation shows your real accuracy, how long you take and where you lose marks.

Practise Valuing benefit guarantees using simulationFree diagnostic mock

More Valuing benefit guarantees using simulation questions