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The purpose of this paper is to evaluate Alberta’s cattle loan guarantee program. It measures the risk premiums on lending that would accrue to banks participating in the program, estimates the value (price) of the loan guarantee, and estimates the interest subsidy provided by the program.

A cash flow model of cattle feeding is used. The model estimates a measure of risk that is applied to option pricing models to estimate the value of the guarantee.

Insurance premiums for the credit risk to lenders are 0.20 percent of the value of the loan for the entire feeding period, and 0.41 percent for backgrounding but negligible for finishing. The price of the loan guarantee estimated by the Black-Scholes model is 4.43 percent of the value of the loan and is comparable to prices estimated by the binomial model. The program provides a subsidy rate of 4.58 percent.

Charging a guarantee fee can potentially eliminate the interest subsidy inherent in the program. But this would necessitate determining the impact of the guarantee fee on the additional access to credit that has been achieved through the program.

Different levels of risk for backgrounding and finishing imply different risk premiums on cattle loans. Therefore interest on cattle loans should reflect not only the individual farmer’s risk profile but also the nature of the feeding operation.

This is the first paper to simultaneously estimate risk premiums on cattle feeding loans, the value of the loan guarantee provided by the Alberta Feeder Association Loan Guarantee Program, and the inherent interest subsidy.

Two marketing schemes that provide protection against downside price risk are examined. The buy‐back guarantee allows the property purchaser to sell the property back to the developer at the original purchase price, while the guaranteed appreciation plan assures the buyers of a minimum price appreciation at the end of a specified period. Both plans essentially provide the property purchaser with put options with contingent payoffs that differ in terms of the strike price. This paper examines the value of the buy‐back guarantee and the guaranteed appreciation plan as well as providing a framework for evaluating the put options. The key finding is that the time value of such put options is extremely low if they are too deep in‐the‐money and if expected volatility is low. If so, a careful examination of the terms offered suggests that the buy‐back guarantee is expensive. In contrast, the guaranteed appreciation plan can be regarded as a free option because it provides a strike price that is above the purchase price. Hence, property purchasers react favorably to the guaranteed appreciation plan. Finally, implications for marketing and pricing strategies are examined.

Platforms in two-sided markets are known to provide subsidies to either buyers or sellers, in order to take advantage of cross-group externalities inherent in such industries. Online travel agents can be thought of as platforms facilitating trade between passengers and travel service providers (airlines). This chapter evaluates the effects of a buyer subsidy provided by one major US online travel agent – a low-price guarantee offered by Orbitz. We find evidence consistent with increased airline participation with this travel agent upon implementation of the low-price guarantee policy. Our results also confirm the theoretical claims that most-favored customer low-price guarantee policies are procompetitive.

Seeks to study the effect of a low‐price guarantee (PG) on store price image and store patronage intention. Two kinds of low‐price guarantee are studied: a price‐matching guarantee (PMG) where the price difference is refunded and a price‐beating guarantee (PBG) where a retailer offers an additional compensation.

A questionnaire is used to collect information on 180 non‐student respondents in an experimental framework where low‐price guarantee dimension is manipulated through three advertisements for printers.

Findings are: first, that PG indeed lowers store price image, increases the confidence that the store has lower prices and increases patronage intention; second, that, compared with a PMG whose effects are positive but rather small, a PBG further lowers the store price image on the low prices dimension without increasing the intention to search for lower price, this intention being already rather high in the PMG condition; third, that a larger effect is observed for non‐regular customers.

Research limitations are associated with the data collection. For greater reality the study uses an existing retail chain, so specific effects coming from this chain could influence the results but this bias cannot be evaluated as the experiment involves one retailer only.

Practical implications are that price image can be manipulated without any change in pricing policy by a low‐price guarantee and that the interest to adopt a price‐beating guarantee is real.

The contribution of this study lies in its focus on a large PBG level that retailers already apply and in demonstrating that a PG depends on the relationship between the consumer and the retailer with a stronger effect on non‐regular customers.

The purpose of this paper is to investigate the effects of three price-matching guarantee (PMG) variables, including refund depth, refund period and competitive scope, on consumer response; the moderating role of consumer search costs is also examined.

This study uses a scenario simulation method with a 2×2×2 factorial design to test the research model and hypotheses.

The results indicate that refund depth has a significant effect on price perception and purchase intention, while competitive scope has a significant effect on purchase intention. In addition, the effects of both refund depth and competitive scope on price perception are moderated by consumer search costs.

This study is a pioneering effort to explore the effects of PMGs variables on consumer response in the context of online retailing. These findings provide several important theoretical and practical implications for the PMG strategy of online retailing.

A variety of equity-linked insurance contracts such as variable annuities (VA) and equity-indexed annuities (EIA) have gained their attractiveness in the past decade because of the bullish equity market and low interest rates. Due to the complexity of their inherent nature, pricing and risk management of these products are quantitatively challenging and therefore have become sources of concern to many insurance companies. From a financial engineer's perspective, the options in VA and those embedded in EIA can be modeled as puts and calls, respectively, and enable the use of numerical option pricing techniques. Additionally, values of VA and EIA move in opposite directions in response to changes in the underlying equity value. Therefore, for insurers who offer both businesses, there are natural offsets or diversification benefits in terms of economic capital (EC) usage. In this chapter, we consider two specific products: the guaranteed minimal account benefit (GMAB) and the point-to-point (PTP) EIA contract, which belong to the VA and EIA classes respectively. Taking into account mortality risk and suboptimal dynamic lapse behavior, we build a framework that quantifies the value of each product and the natural hedging benefits based on risk-neutral option pricing theory. With Monte Carlo simulation and finite difference methods being implemented, an optimum product mixture of those two contracts is achieved that deploys capital the most efficiently.

In financial planning, customers are typically confronted with choosing a premium payment scheme when investing in a mutual fund, which is often equipped with an investment guarantee to provide downside protection. Guarantee costs may thereby also be charged differently depending on the provider. The paper aims to investigate the impact of the premium payment method on different performance measures for a mutual fund with an investment guarantee.

The paper compares a fund with annual and upfront premiums as well as constant guarantee costs versus the guarantee price as an annual percentage fee of the fund value, always ensuring that the present value of premium payments is the same for all product variants. The paper further studies the relevance of the guarantee level and the contract term.

The results emphasize that even though the present value of premiums paid into the contract is the same, the type of premium (upfront versus annual) as well as the type of guarantee cost (upfront versus annual fee) has a considerable impact on the performance.

Providers can thus make a product more attractive for consumers by individually adjusting the premium scheme depending on their preferences and by making the resulting risk-return-profile transparent, while keeping the other contract characteristics unchanged (e.g. extent of the guarantee).

To date, there has been no comprehensive analysis with specific focus on the impact of different premium payment schemes (in particular with respect to savings premiums and guarantee costs) on risk and return of a mutual fund with otherwise given contract characteristics such as the underlying fund strategy and the investment guarantee, even though the premium scheme itself can already have a considerable impact on the terminal payoff distribution and thus risk-return profiles. In addition, such an analysis can provide important information for consumers and providers in designing and choosing attractive products by simply adjusting the premium scheme (if possible) instead of or in addition to changing other product features.

Given the widespread adoption of low-price guarantees and discussion of their anti-competitive effects in the theoretical literature, it is unfortunate that there is little empirical evidence available on the subject. This chapter analyzes the effects of low-price guarantees on advertised tire prices, based on P185/75R14 retail tire prices collected from U.S. Sunday newspapers. We find that although a tire retailer's own price-matching or price-beating guarantee has no significant effect on the retailer's advertised tire price, an increase in the percentage of firms in the market announcing low-price guarantees tends to raise the firm's advertised tire price. In particular, we find that the predicted tire prices are approximately $4 higher (about 10 percent of the average advertised price of a P185/75R14 tire) in markets in which all firms advertise an LPG when compared to markets without any LPGs.

This study aims to examine the importance of credit and low price guarantee (LPG) on consumer purchase intention across types of retail store formats in an emerging market context.

A 2 (kirana/modern retail)×2 (high/low LPG)×2 (credit/no credit) experimental design was used for this study. A sample of 200 respondents was asked about their purchase intention for a newly introduced hypothetical toothpaste brand and six hypotheses were tested.

Findings show that credit and level of LPG determine consumer's purchase intention across store formats. The presence of credit and high LPG increases the purchase intention; however, relatively importance of these two varies by type of store. The absence of credit at kirana store definitely reduces the buying intention, while same is not true for modern retail store, where level of LPG is more important than the credit. Interestingly, buyer is likely to discount high LPG for a month's credit offered by a kirana store.

The study can help practitioners and scholars to understand consumer responses to credit and LPG in buying decisions, and subsequently in designing a better product offer at a particular store format in emerging markets.

Important insights are provided about the consumer behavior resulting from the presence or absence of credit and high or low levels of LPG in an emerging market context. The study also has public policy implications in a country where FDI in retail is a hotly debated topic.