Factors Affecting The Parameter Values For Fixed Index Annuities
October 21, 2020 by Wade Pfau
The previous discussion makes clear that the parameters offered by an FIA (floors, participation rates, caps, spreads, and buffers) will depend in large part on the level of interest rates and the cost of financial derivatives for the associated index. Higher interest rates mean that principal can be protected with less assets, which then leaves more that can be devoted to the options budget used to purchase upside exposure. Participation rates can conceivably be higher than 100 percent if interest rates are high enough and the call options are cheap enough. On a related point, it should also be clear that if the owner is willing to accept a lower floor, it would be possible to gain more upside potential since less is needed for bonds and more is available to purchase call options.
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