Instead of discounting the guarantee cost and comparing it with the discounted value of the charges, we accumulate the charges to the maturity date and compare it with the cost of the guarantee at that point. Then find the charging rates (ie prices) that result in these accumulated charges covering the guarantee cost in 90% of simulations.
Accumulating means roll up with interest (at a suitable non-unit interest rate) from the time the charge emerges up to the maturity date.
Last edited by a moderator: May 12, 2017