The reset decision for segregated fund maturity guarantees

A segregated fund is a mutual fund whose value is protected by a maturity g uarantee. An investor in such a fund may have the option of periodically re setting this guarantee to extend its life and increase the guaranteed amoun t. We model this guarantee reset decision using a discrete time Markov chai n and analyse a decision strategy based upon a return threshold. We charact erise the optimal value for this threshold and examine its properties. We s how that the intuitive strategy of resetting the guarantee whenever the fun d's value has increased is not optimal but seems to provide good results. ( C) 2001 Elsevier Science B.V All rights reserved.