VALUATION OF EARLY EXERCISABLE INTEREST-RATE GUARANTEES

Interest rate guarantees are important elements of many financial cont racts offered in today's financial markets. For example, life insuranc e policies often contain an explicit interest rate guarantee that ensu res the investor a certain minimum return during some specified period . Sometimes the interest rate guarantee is of American type in the sen se that it applies for a period of time chosen by the investor. In lif e insurance contracts this is labeled the surrender feature. This arti cle analyzes the valuation of American or early exercisable interest r ate guarantees. We draw on some recent results on American option pric ing theory to obtain analytic formulas for the interest rate guarantee s. The theoretic results are accompanied by numerical examples, and co mparisons to European type guarantees are made.