||Investment guarantee insurances provide the insured additional guarantee for protection, but these guarantees may bring a tremendous loss for insurance company. Therefore, the construction of valuation for guarantee product is very important. To avoid this loss from guarantee, hedging strategy and instrument should be considered prudentially. Many factors affect the valuation structure such as mortality, guarantee rate, maturity. Therefore, taking some factors in consideration for valuation, we use Black-Scholes formula and binomial tree method to simulate different investment guarantees and simulate guaranteed minimum withdrawal benefit (GMWB) by tree method that GMWB could not be simulated by Black-Scholes formula. For construction of hedging, we follow Hardy (2003) to separate two parts, risk-free component and risky component, and use delta hedging to observe the effectiveness of delta hedging for different investment guarantee. For our observation, there are no significant different to investment guarantee in delta hedging by different two valuation methods. However, for GMWB, the maturity at 5 years is more effective than at 10 years. The reason is that the longer duration makes more uncertainty for hedging. In frequency of hedging for GMWB, there is no significant different between monthly and quarterly, but when frequency is half of year, the effectiveness is less powerful. Moreover, there is almost same effective in different transaction cost. These indicates that different factors affect hedging to different effects.|
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