The text of this paper, together with the abstract of the discussion held by the Institute of Actuaries on 24 June 1996, are printed in British Actuarial Journal, 2, V, pages 1273-1322.

This paper forms notes for discussions about the European single currency at the Institute of Actuaries and the Faculty of Actuaries. The author assumes (and hopes) that the single currency will start on time in 1999, with most of the Member States of the European Union included. The key dates are 1 January 1999, when the exchange rates between currencies will become irrevocably locked and become conversion rates, and 2002, when euro notes and coins will be introduced, and the retail banking sector will convert to euros. The advantages of a single currency are potentially very great; the costs are also considerable. Governments of Member States will no longer be able to get a competitive advantage by devaluing their currency, or be able to choose an inflation rate that is different from that of the E.U. as a whole. The key document is the Maastricht Treaty, and the conversion criteria included therein are discussed. The author concludes that, if governments choose to interpret the criteria leniently, all countries, except possibly Greece, will be included in 1999, with Greece joining a year or two later. Some of the practical considerations for actuaries, including life insurance, general insurance, pensions, banking and investment are mentioned. The paper is not comprehensive, and is a personal contribution to stimulate discussion.

Using an empirical approach to capital market returns analogous to that used for mortality rates by Halley more than three centuries ago to establish life assurance on a sound and scientific footing, a theory of option pricing is built up in terms of the same three key components as for life assurance premiums, namely the expected cost of claims, an allowance for expenses, and a contingency margin as a reserve against the risk of insolvency. The dimensionality of the process describing security returns to any future point in time is increased from two to three by the addition of systematic variability around ‘central values’ to the standard descriptors of expected return and variance of return. It is shown that this approach, which involves only common sense principles and elementary mathematics, has important theoretical, practical and regulatory advantages over the Black-Scholes and related methodologies of modern finance theory.

The paper examines the suitability of the stable family of distributions with the Maturity Guarantees Working Party's stochastic investment model (Ford et al, 1980). It then examines the effect of replacing the Gaussian assumption made by the working party with a more general stable distribution. It also explains how the appropriate stable distribution can be fitted.