ABSTRACT
Economic scenario generators have been used by insurance companies to price insurance products (e.g., variable annuities) embedding guarantees and calculate capital adequacy. There are two types of economic scenarios that are commonly used by insurance companies: risk-neutral scenarios and real-world scenarios. This chapter implements a simple economic scenario generator for generating risk-neutral scenarios of an equity security. The inputs of the scenario generator include a list of forward rates and six parameters: the volatility, the horizon of the scenarios, the time step, and the number of paths, a seed, and the precision of the scenarios. There are numerous approaches to generate risk-neutral scenarios for an equity security. One common approach is to use the Black–Scholes model. The chapter organizes the Visual Basic for Applications (VBA) code into two modules: the MGenerator module and the MInterface module. This module contains VBA code for generating risk-neutral scenarios based on the Black–Scholes models.
