Pricing and hedging of variable annuities

Variable annuity products are unit-linked investments with some form of guarantee, traditionally sold by insurers or banks into the retirement and investment market. Pricing VAs is similar to pricing long-dated financial derivatives on a basket of assets. In this paper we explore the pricing, sensitivity and risk management of a specific GMWB contract

By far the largest VA market in the world is the United States, where variable annuities are widely used in retirement planning. In the absence of compulsory annuity purchase requirements on retirement such as in the UK, VAs are a common and long-established retirement investment with some tax advantages.

Variable annuities are also referred to as accumulator products or as GMxBs where, in the latter, the ‘x’ describes the nature of the guarantee in the product,commonly known as the rider. A