are inherently associated with fairly extreme stock price movements—that is, we are interested in the tail of the stock price distribution. <br>Traditional deterministic actuarial methodology does not deal with tail risk. We cannot rely on a few deterministic stock return scenarios generally accepted as “feasible.” Our subjective assessment of feasibility is not scientific enough to be satisfactory, and experience—from the early 1970s or from October 1987, for example—shows us that those returns we might earlier have regarded as infeasible do, in fact, happen.<br>A stochastic methodology is essential in understanding these contracts and in<br>designing strategies for dealing with them.
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