Journal article
Evaluation of the GIC rollover option
Insurance, mathematics & economics, Vol.14(2), pp.117-127
1994
DOI: 10.1016/0167-6687(94)90095-7
Abstract
In order to persuade its customer with a maturing Guaranteed Investment Contract (GIC) to roll it over for another term, an insurance company may have to provide him with an incentive in the form of a call option. That is, if the customer commits himself now to reinvest the proceeds from his current GIC in a new GIC, the interest rate for the new GIC will be the maximum of today's interest rate and the interest rate on the day when the current GIC matures. This paper shows that there is a very simple formula for determining the interest-rate spread throughout the term of the new contract to pay for the option. The formula for the interest-rate spread is: Multiply by 0.4 the standard deviation of the yield rate of the underlying zero-coupon bond at the reinvestment date as estimated at the contract commitment date.
Details
- Title: Subtitle
- Evaluation of the GIC rollover option
- Creators
- Hal W Pedersen - Olin School of Business, Washington University, St. Louis, MO 63130-4899, USAElias S.W Shiu - Department of Statistics and Actuarial Science, University of Iowa, Iowa City, IA 52242-1419, USA
- Resource Type
- Journal article
- Publication Details
- Insurance, mathematics & economics, Vol.14(2), pp.117-127
- Publisher
- Elsevier B.V
- DOI
- 10.1016/0167-6687(94)90095-7
- ISSN
- 0167-6687
- eISSN
- 1873-5959
- Language
- English
- Date published
- 1994
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9983985938402771
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