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Old 01-09-2012, 02:37 PM
2pac Shakur 2pac Shakur is offline
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Default Checking Risk Neutral Calcs

How do you know what interest rate to discount claims and charges at?

Thanks
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Old 01-09-2012, 02:44 PM
2pac Shakur 2pac Shakur is offline
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Right now it looks like each month's 90day treasury is used for claims and charges.
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Old 01-09-2012, 03:23 PM
Academic Actuary Academic Actuary is offline
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What is the purpose of the calculation? Risk neutral calculation has a very specific purpose which is to value the cash flows as if they were tradeable assets in a complete market. If the underlying cash flows can't be replicated with tradeable assets then you are assuming that the market price of risk for whatever is generating uncertainty is 0. This may be reasonable if claims are unrelated to economic variables.

If risk neutral valuation is appropriate LIBOR rates are generally preferred to Treasury rates as an arbitrageur would not be able to borrow at Treasury rates.
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Old 01-09-2012, 05:37 PM
2pac Shakur 2pac Shakur is offline
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This is for cash flows on a VA with a GMWB.
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Old 01-11-2012, 09:06 PM
Genre Genre is offline
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Using risk neutral valuation would give you the market consistent value of your guarantee; that is the value you could sell your guarantee in the market. I guess LIBOR is good, but I have also seen curves bootstrapped from swap rates or treasury.

Note that you cannot use risk neutral projections for anything but finding the CURRENT value of your guarantee. A real-world scenario generator based on historical data and probably another model than lognormal would be required to have meaningful projections.
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Old 01-14-2012, 03:20 PM
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WWSituation WWSituation is offline
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Is it not common knowledge that a risk-neutral option value would use a "risk-free" term structure? It is a big part of what makes the value risk-neutral. Is the question whether or not it is OK to use swap rates as a representation of the risk-free rates?
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