Valuation and analysis on complex equity indexed annuities

Abstract

Equity-indexed annuities (EIAs) are popular products that eliminate the downside risk while stillproviding upside potential. Among the three major categories of EIAs, ratchet EIAs are the mostpopular. Ratchet EIAs with quanto features emerge due to differences in asset returns acrosscountries. The literature covers the pricing of the EIAs that are not quantos, and this paper fillsthe hole. In deriving pricing formulas, we add an exchange rate model as well as a foreign risk-free rate model to the pricing framework of Black and Scholes. Our formulas cover quanto ratchetEIAs for both compound and simple versions that may have a return cap and employ two types ofgeometric return averaging. The numerical analyses illustrate how contract features and marketparameters affect contract values. The results also highlight the significance of quantos in con-tract pricing