I have liabilities that offer policyholders a guaranteed investment return at maturity. The payoff is simply max(Fund Value at maturity, Guaranteed Value) to the policyholder, for the liabilities, this is easily accessible in Prophet. The payoff for the company is max(Guaranteed Value - Fund Value at maturity, 0) (EMBEDDED PUT OPTION)!, relates to vanilla put with max(K - S_T, 0).
Now the underlying fund backing the liabilities is an Equity Fund, this equity fund is made up of assets similar to the JSE Top40 index. To hedge the Option, I therefore buy a Put Option on the JSE Top40 (BASEKET OPTION WITH 40 INDIVIDUAL STOCKS). Now I need to assess the effectiveness of the hedge by showing that in a years' time the Expected Value of the Option will be equal to the value of the Liabilities, though note that the underlying is a basket of Options!!!PLEASE KINDLY HELP
I work in the capital division of a life insurance company, and yes this is a real life situation that the CRO of our company wants the answer for!!
Last edited by a moderator: Feb 17, 2015