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

55 NTU Management Review Vol. 29 No. 2 Aug. 2019 Table 2 Fair Prices of Various Annuities Annuity 3-year Maturity 5-year Maturity 10-year Maturity IAL 2.6289 3.7214 5.9587 AL 2.5037 3.5442 5.5049 IAL (no restriction) 3.8561 5.8813 8.8916 IAL (cap) 2.5947 3.6189 5.5846 IAL (floor) 3.8037 6.0137 9.0185 Note: IAL, AL, IAL (no restriction), IAL (cap) and IAL (floor) denote inflation-linked annuities with cap and floor, ordinary annuities without inflation risk, inflation-linked annuities without a cap and floor, inflation-linked annuities with a cap, and inflation-linked annuities with a floor, respectively. Alternatively, the prices of the annuities with a cap and floor generally increase as the cap or floor values increase. The sensitivities of volatilities are larger than those of the correlation coefficients. 4. Research Limitations and Implications In this research, we focus on the fair prices of various annuities to analyze the effects of inflation risk and interest rates on the cost of annuities. However, managing risks for inflation-linked annuities remains a critical challenge, which was not covered in this study. In the future, we will further explore inflation-linked annuity hedging. 5. Originality and Contribution Increasing life expectancy is a common phenomenon worldwide. To ensure that future consumption does not fall below a minimum acceptable standard due to longer lifespans, inflation risk becomes a pressing concern. According to a retirement survey by the Society of Actuaries, 1 71% of preretirees and 58% of retirees in the United States are concerned with the ability to maintain the value of their savings and investments in line with the rising inflation. Thus, inflation-linked annuities are crucial products that allow individuals to be shielded from inflation risk in retirement. 1 The survey was reported by Society of Actuaries in USA in 2011.