Filter by Categories
Accounting
Banking

Insurance




Cliquet Option


In principle, a cliquet option/ ladder option (ratchet option) is an option (or a warrant, index-linked note) that subjects its minimum payoff to an upward rest when the underlying price/ rate hits or trades through pre-defined threshold levels (steps) or reaches a specific level on preset reset dates. Once a cliquet/ ratchet mechanism is set on, a minimum level of the option’s payout can be guaranteed, even if the underlying price/ rate subsequently declines.

In insurance, a cliquet option can allow the policyholder to improve the guaranteed benefit amount to the higher of two values: 1) the account value and 2) the current guarantee amount on the cliquet / ratchet date, while the contract term remains unadjusted. The option’s gains are locked in on reset dates for the option’s holder. Such an option can be linked to an equity index and resets periodically (e.g., monthly) at the money (ATM). Maturities may cover periods shorter than insurable annuities (e.g., 1 -2 years), but these options can be hedged from the market to cover longer maturities with lower costs.



ABC
Insurance revolves around risk reduction or mitigation through transferring the risks of individuals and firms to an insurance company. Insurers take on the risk and ...
Watch on Youtube
Remember to read our privacy policy before submission of your comments or any suggestions. Please keep comments relevant, respectful, and as much concise as possible. By commenting you are required to follow our community guidelines.

Comments


    Leave Your Comment

    Your email address will not be published.*