[discount_rates_problem] [main_variables] [contracts]

Two different contracts are considered, namely an endowment (or “Cap”) and an annuity (or “Inc”), both lasting for 15 years. Respectively, the benefit is either 10,000 or 1,000 pa in arrears, with all payments being certain. The only finance available is the initial single premium and there can be no correction payments during the period (in either direction). If I knew how to price the contract, then the final assets would be either 10,000 (nominal or real) or zero; this is harder than it looks. Essentially, I am exploring the difference between volatile market related results and the alternative results arising under the selected smoothing mechanism.