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Pricing Asian options and equity-indexed annuities with regime switching by the trinomial tree method. (English) Zbl 1219.91145

Summary: Equity-indexed annuities (EIAs) provide investors with a minimum rate of return and at the same time the opportunity of gaining a profit that is linked to the performance of an equity index. These properties make EIAs a popular product in the market. For modeling the equity index process and calculating the price of EIAs, as the maturity of EIAs usually is long, it is more reasonable to assume that the interest rate and the volatility of the equity index are stochastic processes. One simple way is to apply the regime-switching model, which allows these parameters depending on the market situation. However, the valuation of derivatives in such models is challenging, especially for the strong path-dependent options such as Asian options. A trinomial tree model is

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
91G60 Numerical methods (including Monte Carlo methods)
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