REU 2011 – Pricing and Hedging Variable Annuities Using Monte Carlo Methods

Variable annuities are becoming a very popular retirement option because of the various guarantees and protections they offer. To avoid having an overly complicated set of fees, insurance companies are seeking more efficient ways to hedge against risk. We use Monte Carlo methods to determine the variable annuity’s price and its sensitivities to market conditions. Ultimately, we will determine more effective hedging strategies for insurance companies to reduce their chances of catastrophic loss.