Abstract:
This paper proposes a consistent approach to discrete time valuation in insurance
and finance. This approach uses the growth optimal portfolio as reference unit
or benchmark. When used as benchmark, it is shown that all benchmarked
price processes are supermartingales. Benchmarked fair price processes are
characterized as martingales. No measure transformation is needed for the fair
pricing of insurance policies and derivatives. The standard actuarial pricing rule
is obtained as a particular case of fair pricing when the contingent claim is independent
from the growth optimal portfolio.
