Pricing long-dated insurance contracts with stochastic interest rates and stochastic volatility

In this paper we extend the stochastic volatility model of Schöbel and Zhu [1999] by including stochastic interest rates. Furthermore we allow all driving model factors to be instantaneously correlated with each other, i.e. we allow for a correlation between the instantaneous interest rates, the volatilities and the underlying stock returns. By deriving the characteristic function of the log-asset price distribution, we are able to price European stock options in closed-form by Fourier inversion. Furthermore we present a foreign exchange generalization and show how the pricing of forward-starting options like cliquets can be performed. Additionally we discuss the practical implementation of these new models.