October 27, 2022 | Blog

Index Pricing [Part 3]: Engineered Index Par Rates

By Sam Wiss Download AS PDF

Thanks again for joining us for Part 3 of our index pricing series. 

In Part 1, we went through what an option is, how is an options budget determined by a carrier, and how the options budget translate to the rates offered by a carrier based on the current market price for options. 

In Part 2, we talked through why participation rates on S&P 500 strategies have not kept up with cap rates as interest rates have increased. The simple explanation is that although carrier option budgets have increased dramatically as interest rates have increased, so has the cost to hedge uncapped exposure to the S&P 500. As a result, S&P 500 participation rates have stayed relatively flat. 

This raises an interesting question that we’re going to tackle today – if participation rates for S&P 500 strategies have been flat, then why have participation rates gone through the roof in uncapped strategies using non-S&P 500 indices created by banks and asset managers, what we at Life Innovators refer to as engineered indices? The difference, as we’ll see, is in the index.