Valuing equity-linked annuities under high-water mark fee structure

Abstract

This paper studies the valuation of equity-linked investment products embedded with a high-water mark (HWM) fee structure. Under the HWM fee structure, the insurance company charges threshold fees at a constant rate from the policyholder's account whenever the account value is lower than a pre-specified level, and levies HMW fees at another constant rate whenever the account is hitting new record highs that are higher than another pre-specified level. The dynamics of the logarithmic value of the policyholder's account, before fees, is assumed to follow either a two-sided jump-diffusion process with double exponential jumps, or a down-ward jump-diffusion process with exponential jumps. For th..