臺大管理論叢 NTU Management Review VOL.29 NO.2

Effect of Inflation on the Cost of Inflation-Linked Annuities Considering Stochastic Interest Rate and Inflation Rate Models 54 (11) and When Y t j = 1, an exactly closed-form solution of ordinary annuities without inflation risk is obtained, as shown in Equation (12). (12) Based on Equations (9)-(12), sensitivity analyses were performed. The empirical results (Table 2) demonstrate that the fair prices of inflation-linked annuities are higher than those of annuities without inflation risk. The price of inflation-linked annuities with a floor is the highest and that of ordinary annuities without inflation risk is the lowest. These findings are derived from the fact that final payoffs of inflation-linked annuities with a floor are generally the highest and ordinary annuities lowest. In addition, the prices of annuities increase as maturities increase. .