Share This Article:

Valuation of Certificates on a Straddle with Forward Start—Theory and Evidence

Full-Text HTML XML Download Download as PDF (Size:291KB) PP. 341-349
DOI: 10.4236/tel.2014.45045    3,967 Downloads   4,717 Views   Citations

ABSTRACT

This paper introduces a new financial product named Certificates on a Straddle with Forward Start and provides detailed descriptions of the product specifications. It shows that the payoff of a Certificate on a Straddle with Forward Start can be duplicated by the combination of long positions in call and put options on the underlying asset. A pricing formula is developed to price the certificates. A certificate issued by Credit Suisse is presented as an example to examine how well the model fits empirical data. The results show that issuing Certificates on a Straddle with Forward Start is a profitable business and the results are in line with previous studies pricing other structured products.

Cite this paper

Hernandez, R. and Shao, Y. (2014) Valuation of Certificates on a Straddle with Forward Start—Theory and Evidence. Theoretical Economics Letters, 4, 341-349. doi: 10.4236/tel.2014.45045.

References

[1] Das, S. (2001) Structured Products and Hybrid Securities. John Wiley & Sons Ltd., Singapore.
[2] Hernandez, R., Lee, W. and Liu, P. (2010) An Economic Analysis of the Japanese Reverse Exchangeable Market. Advances in Financial Planning and Forecasting, 4, 159-191.
[3] Hernandez, R., Lee, W., Liu, P. and Dai, T. (2013) Outperformance Certificates: Analysis, Pricing, Interpretation, and Performance. Review of Quantitative Finance and Accounting, 40, 691-713. http://dx.doi.org/10.1007/s11156-012-0294-z
[4] Isakov, D. (2007) Le prix élevé de certains instruments tient aux frictions qui apparaissentsur le marché. Le Temps.
[5] Laise, E. (2006) An Arcane Investment Hits Main Street. Wall Street Journal (Eastern Edition), 247, D1-D3.
[6] Lyon, P. (2005) Editor’s Letter: The NASD Guidance Does Seem to Suggest That Structured Products Should Be the Preserve of the Privileged Few Who Are Eligible for Options Trading. Structured Products.
[7] Maxey, D. (2006) Market Builds for Structured Products. Wall Street Journal (Eastern Edition).
[8] National Association of Securities Dealer (2005) Notice to Members 05-59 Guidance Concerning the Sale of Structured Products. NASD, New York.
[9] Ricks, T. (1988) SEC Chief Calls Some Financial Products Too Dangerous’ for Individual Investors. Wall Street Journal, 1.
[10] Simmons, J. (2006) Derivatives Dynamo. Bloomberg Markets, 55-60.
[11] Rubinstein, M. (1991) Forward Start Options: Published as “Pay Now, Choose Later”. Risk Magazine, 4, 13.
[12] Hull, J. (2003) Options, Futures, and Other Derivatives. Pearson Education Inc., Upper Saddle River.
[13] Abken, P. (1989) A Survey and Analysis of Index-Linked Certificates of Deposit. Working Paper—Federal Reserve Bank of Atlanta, Atlanta, 89.
[14] Baubonis, C., Gastineau, G. and Purcell, D. (1993) The Banker’s Guide to Equity-Linked Certificates of Deposit. Journal of Derivatives, 1, 87-95. http://dx.doi.org/10.3905/jod.1993.407880
[15] Benet, B., Giannetti, A. and Pissaris, S. (2006) Gains from Structured Product Markets: The Case of Reverse-Exchangeable Securities (RES). Journal of Banking and Finance, 30, 111-132.
http://dx.doi.org/10.1016/j.jbankfin.2005.01.008
[16] Black, F. and Scholes M. (1973) The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81, 637-654. http://dx.doi.org/10.1086/260062
[17] Burth, S., Kraus, T. and Wohlwend, H. (2001) The Pricing of Structured Products in the Swiss Market. Journal of Derivatives, 9, 30-40. http://dx.doi.org/10.3905/jod.2001.319173
[18] Chance, D. and Broughton, J. (1988) Market Index Depository Liabilities. Journal of Financial Services Research, 1, 335-352. http://dx.doi.org/10.1007/BF00235203
[19] Chen, A. and Kensinger, J. (1990) An Analysis of Market-Index Certificates of Deposit. Journal of Financial Services Research, 4, 93-110. http://dx.doi.org/10.1007/BF00352565
[20] Chen, K. and Sears, R. (1990) Pricing the SPIN. Financial Management, 19, 36-47.
http://dx.doi.org/10.2307/3665633
[21] Grunbichler, A. and Wohlwend, H. (2005) The Valuation of Structured Products: Empirical Findings for the Swiss Market. Financial Markets and Portfolio Management, 19, 361-380.
http://dx.doi.org/10.1007/s11408-005-6457-3
[22] Hernandez, R., Brusa, J. and Liu, P. (2008) An Economic Analysis of Bonus Certificates—Second-Generation of Structured Products. Review of Futures Markets, 16, 419-451.
[23] Hernandez, R., Jones, J. and Gu, Y. (2011) An Economic Analysis of Protect Certificates—An Option-Pricing Approach. Banking and Finance Review, 3, 17-40.
[24] Hernandez, R., Lee, W. and Liu, P. (2010) An Economic Analysis of Reverse Exchangeable Securities—An Option-Pricing Approach. Review of Futures Markets, 19, 67-95.
[25] King, S. and Remolona, E. (1987) The Pricing and Hedging of Market Index Deposits. FRBNY Quarterly Review, 12, 9-20.
[26] Lyon, P. (2005) US Retail in the Firing Line. Structured Products.
[27] Merton, R.C. (1973) Theory of Rational Option Pricing. Bell Journal of Economics and Management Science, 4, 141-183. http://dx.doi.org/10.2307/3003143
[28] Stoimenov, P. and Wilkens, S. (2005) Are Structured Products “Fairly” Priced? An Analysis of the German Market for Equity-Linked Instruments. Journal of Banking and Finance, 29, 2971-2993. http://dx.doi.org/10.1016/j.jbankfin.2004.11.001
[29] Wilkens, S., Erner, C. and Roder, K. (2003) The Pricing of Structured Products in Germany. The Journal of Derivatives, 11, 55-69. http://dx.doi.org/10.3905/jod.2003.319211

  
comments powered by Disqus

Copyright © 2017 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.