Valuation of equity-linked life insurance contracts via efficient hedging in the BIack–Scholes model

Here we develop an efficient hedging methodology to calculate theoretical price and survival probabilities for equity-linked life insurance contracts with stochastic/flexible guaranties. We work in the model given in details in Section 2.2, formulas (2.39)–(2.45) . The corresponding description of the contract under consideration is presented by formulas (2.50)–(2.52) and (2.54)–(2.55) . In contrast with the problem of Section 2.2, the writer of the contract with maturity time T faces a possibility of a loss, created by the difference between the contract’s payoff and the value of the capital generated by the initially invested amount (H–X _T )⁺, which is called a shortfall.