The Equity Indexed Annuity: A Monte Carlo Forensic Investigation into a Controversial Financial Product

Equity Indexed Annuities (EIAs) are controversial financial products because the payoffs to investors are based on formulas that are supposedly too complex for average investors to understand. This brief describes how Monte Carlo simulation can provide insight into the true risk and return of an EIA. This approach can be used as a project assignment or an in‐class assignment to demonstrate the ability of Monte Carlo simulation to solve problems involving uncertainty and nonlinear payoffs.