Reverse bonus certificate design and valuation using pricing by duplication methods

Martina Bobriková, Monika Harčariková

Abstract


In this paper we perform an analysis of a capped reverse bonus certificate, the value of which is derived from the value of an underlying asset. A pricing formula for the portfolio replication method is applied to price the capped reverse bonus certificate. A replicating portfolio has profit that is identical to profit from a combination of positions in spot and derivative market, i.e. vanilla and exotic options. Based upon the theoretical option pricing models, the replicating portfolio for capped reverse bonus certificate on the Euro Stoxx 50 index is engineered. We design the capped reverse bonus certificate with various parameters and calculate the issue prices in the primary market. The profitability for the potential investor at the maturity date is provided. The relation between the profit change of the investor and parameters’ change is detected. The best capped reverse bonus certificate for every estimated development of the index is identified.

 


Full text: PDF

Keyword(s)


capped reverse bonus certificate, underlying asset, replicating profit, vanilla option, up-and-out option

JEL Codes


G11, G13

References


Baule, R., and Tallau, C., 2011. The pricing of path-dependent structured financial retail products: The case of bonus certificates. The Journal of Derivatives, 18(4), 54-71. DOI: http://dx.doi.org/10.3905/jod.2011.18.4.054

Benet, B. A., Giannetti, A., and Pissaris, S., 2006. Gains from structured product markets: The case of reverse-exchangeable securities (RES). Journal of Banking & Finance, 30(1), 111-132. DOI: http://dx.doi.org/10.1016/j.jbankfin.2005.01.008

Bluemke, A., 2009. How to invest in structured products: a guide for investors and investment advisors. Chippenham: Wiley.

Breuer, W., and Perst, A., 2007. Retail banking and behavioral financial engineering: The case of structured products. Journal of Banking & Finance, 31(3), 827-844. DOI: http://dx.doi.org/10.1016/j.jbankfin.2006.06.011

Burth, S., Kraus, T., and Wohlwend, H., 2001. The pricing of structured products in the Swiss market. The Journal of Derivatives, 9(2), 30–40. DOI: http://dx.doi.org/10.3905/jod.2001.319173

Das, S. R., and Statman, M., 2013. Options and structured products in behavioral portfolios. Journal of Economic Dynamics and Control, 37(1), 137-153. DOI: http://dx.doi.org/10.1016/j.jedc.2012.07.004

Gordiaková, Z., and M., H., 2014, 12-13 June 2014. Principles of Modified Discount Certificates. Paper presented at the European Financial Systems 2014, Lednice.

Gordiaková, Z., and Younis, A. M. A., 2013. Proposal of a new guaranteed certificate using exotic options. Journal of Applied Economic Sciences, 8(2), 191-197.

Grunbichler, A., and Wohlwend, H., 2005. The valuation of structured products: empirical findings for the Swiss market. Financial Markets and Portfolio Management, 19(4), 361-380. DOI: http://dx.doi.org/10.1007/s11408-005-6457-3

Haug, E. G., 2007. The Complete Guide to Option Pricing Formulas (2nd ed.). New York: McGraw-Hill.

Henderson, B. J., and Pearson, N. D., 2011. The dark side of financial innovation: A case study of the pricing of a retail financial product. Journal of Financial Economics, 100(2), 227–247. DOI: http://dx.doi.org/10.1016/j.jfineco.2010.12.006

Hernandez, R., Jones, J., and Gu, Y., 2011. An economic analysis of protect certificates - An option-pricing approach. Banking and Finance Review, 3(2), 17-40.

Hernandez, R., Lee, W. Y., Liu, P., and Dai, T. S., 2013. Outperformance Certificates: analysis, pricing, interpretation, and performance. Review of Quantitative Finance and Accounting, 40(4), 691-713. DOI: http://dx.doi.org/10.1007/s11156-012-0294-z

Hernandez, R., and Liu, P., 2014. An Option Pricing Analysis of Exotic Bonus Certificates. The Case of Bonus Certificates PLUS. Theoretical Economics Letters, 4(5), 331-340. DOI: http://dx.doi.org/10.4236/tel.2014.45044

Hull, J. C., 2012. Options, Futures and Other Derivatives (8th ed.). Harlow: Pearson Education Limited.

Lalić, M., and Szabo, Z. S., 2014. Hedging of Downside Risk with Put Options in Various Stochastic Volatility Environment: Heston Model Approach with Zero Correlation and Zero Market Price of Volatility. Economic Computation and Economic Cybernetics Studies and Research, 48(4), 227-243.

Nelken, I., 1996. The handbook of exotic options: Instruments, analysis, and applications. New York: McGraw-Hill.

Rossetto, S., and Bommel, J., 2009. Endless leverage certificates. Journal of Banking & Finance, 33(8), 1543–1553. DOI: http://dx.doi.org/10.1016/j.jbankfin.2009.03.006

Rusnáková, M., Gordiaková, Z., and Harčariková, M., 2014. Design principles of capped bonus and capped twin-win certificates. Ekonomski pregled, 65(4), 352-382.

Šoltés, M., 2010a. Crude oil trading using turbo certificates. Acta Montanistica Slovaca, 15(1), 1-4.

Šoltés, M., 2010b. Relationship of speed certificates and inverse vertical ratio call back spread option strategy. E+M Ekonomie a Management, 13(2), 119-124.

Šoltés, M., 2012. New Option Strategy and Its Using for Investment Certificate Issuing. 3(1), 199-203. DOI: http://dx.doi.org/10.1016/S2212-5671(12)00140-2

Šoltés, V., 2001. Analysis of long condor strategy application with some proposals related to optimal algorithm in practical investment. Ekonomický časopis, 49(2), 306-317.

Šoltés, V., 2011, 19-20 September 2011. The Application of the Long and Short Combo Option Strategies in the Building of Structured Products, Liberec.

Šoltés, V., and Harčariková, M., 2015. Analysis of using barrier options to the formation of new structured products. Mediterranean Journal of Social Sciences, 6(2), 303-311. DOI: http://dx.doi.org/10.5901/mjss.2015.v6n2p303

Šoltés, V., and Rusnáková, M., 2013. Hedging Against a Price Drop Using the Inverse Vertical Ratio Put Spread Strategy Formed by Barrier Options. Inzinerine Ekonomika – Engineering Economics, 24(1), 18-27. DOI: http://dx.doi.org/10.5755/j01.ee.24.1.3505

Stoimenov, P. A., and Wilkens, S., 2005. Are structured products 'fairly' priced? An analysis of the German market for equity-linked instruments. Journal of Banking & Finance, 29(12), 2971-2993. DOI: http://dx.doi.org/10.1016/j.jbankfin.2004.11.001

Swiss Structured Product Association (SVSP), 2015. Potential suggestions. from http://www.svsp-verband.ch/home/PotenzialVorschlag.aspx?lang=en

Taleb, N., 1997. Dynamic hedging. Managing vanilla and exotic options. Chippenham: Wiley & Sons.

Wilkens, S., Erner, C., and Roder, K., 2003. The pricing of structured products in Germany. The Journal of Derivatives, 11(1), 55-69. DOI: http://dx.doi.org/10.3905/jod.2003.319211

Wilkens, S., and Stoimenov, P. A., 2007. The pricing of leverage products: An empirical investigation of the German market for 'long' and 'short' stock index certificates. Journal of Banking & Finance, 31(3), 735-750. DOI: http://dx.doi.org/10.1016/j.jbankfin.2006.04.004

Younis, A. M. A., and Rusnáková, M., 2014. Formation of the new types of bonus certificates. Actual Problems of Economics, 152(2), 367-375.

Zhang, P. G., 1998. Exotic options (2nd ed.). Singapore: World Scientific Publishing Co.Pte.Ltd.




DOI: 10.1515/aicue-2015-0019