Investment strategy and valuation of with-profits products

Document description

This brief note outlines an option pricing approach to valuing stakes in a with-profits fund. We depart from previous work in this area by not making direct use of Black and Scholes formula. Instead of trying to approximate the benefit structure with the kind of options that trade on exchanges, we seek to model the liabilities accurately, and then to price the resulting flows in a manner consistent with option pricing theory and market prices. This is a preliminary report of work done to date. We hope to update this at the Life Convention, and, in the Spring of 2001, to release the underlying models into the public domain.