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Pricing participating inflation retirement funds through option modeling and copulas. (English) Zbl 1483.91185

Summary: Pension plans and life insurances offering minimum performance guarantees are very common worldwide. In the Brazilian market, the customers of a common type of defined contribution plan have the right to receive, over their savings, the positive difference between the return of a specified investment fund, usually a fixed income fund, and the minimum guaranteed rate, commonly defined as the composition of a fixed interest rate and a floating inflation rate. This instrument can be characterized as an option to exchange one asset, the minimum guaranteed rate, for another, the return of the specified investment fund. In this paper we provide a closed formula to evaluate this liability that depends on two stochastic rates assuming bivariate normality. We also explore the use of copulas for the modeling of the dependence structure and price the options using Monte Carlo simulation to compare the effects of the copula specification in their values. An application with real data is provided. The model makes use of a one-factor Vašíček framework for the term structures of interest rate and inflation rate.

MSC:

91G05 Actuarial mathematics
62P05 Applications of statistics to actuarial sciences and financial mathematics
91G20 Derivative securities (option pricing, hedging, etc.)
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