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5. Life insurance company XYZ guarantees to repay the initial investment into Fund ABC (S = $100) in five years (T = 5) if
5. Life insurance company XYZ guarantees to repay the initial investment into Fund ABC (S = $100) in five years (T = 5) if the proceeds of ABC is below the initial investment ($100). < You are given the following assumptions: < Annual risk free interest rate 2% The dynamic of the fund ABC is described by a GBM of annual drift rate of 5% and annual volatility of 25%. < Ignore all expenses and charges. < The company shall hold a reserve equal to the expected PV of Max(100 - S(T),0). < Question: < Calculate the reserve for this guarantee.
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