TITLE:
Fourier-Cosine Method for Pricing Equity-Indexed Annuity under Heston Model
AUTHORS:
Xingchi Gu, Xiao Wei
KEYWORDS:
Fourier-Cosine Expansion, Equity-Indexed Annuity, Heston Model, Pricing
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.3,
June
30,
2023
ABSTRACT: In this paper, a pricing method based on the Fourier-Cosine series
expansion is introduced for pricing equity-indexed annuities (EIAs) under the Heston model. By means of the Fourier-Cosine series
expansion, the density function of the underlying indexed is recovered from its
characteristic function, and then yields an efficient
way for EIAs pricing. To show the accuracy of the Fourier-Cosine expansion method, numerical
experiments, we provide the numerical results of EIAs price for the classical
Black-Scholes model. It is shown that the computation results obtained by the Foueier-Cosine
series are as accurate as those obtained by
using the Monte Carlo simulation method. The Fourier-Cosine expansion method can be used to obtain the break-even
participation rate under the Heston model with or without a cap in
simple ratchet EIAs.