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A Study on the Pricing of the Equity-linked Structured Financial Products

Author: LiaoZuo
Tutor: ZouHongYuan
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Structured financial products Black-Scholes model Monte-Carlo simulation Binary Tree
CLC: F224
Type: Master's thesis
Year: 2010
Downloads: 485
Quote: 0
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Abstract

With the development of China's economic and social progress, personal wealth growing and showing a trend towards concentration of, for personal wealth attitude, philosophy and approach than a lot of changes. In recent years, the financial gradually open the market to diversify, especially the fierce competition between the commercial banks to stimulate the domestic financial markets, the emergence of a large number of personal finance products, personal finance business has become a launch of all commercial banks in the process of financial innovation main business, trading has expanded rapidly. Currently, all commercial banks competing to market the distinctive personal finance products, such products have become the manifestation of the business of retail banking and treasury operations core competitiveness. Since 2003, since the issuance of the first structured financial products, structured financial products with its unique combination of configuration and flexible terms of design gradually become the focus on the personal finance market. Domestic and foreign commercial banks have been offering distinctive structured financial products, these products - sought after by the advent of investor enthusiasm, even lining up to buy some of the products at issue also. At the same time, however, the majority of investors structural design of structured financial products, the trigger mechanism, the income distribution is not very understanding. The so-called structured financial products, a class of financial products, the combination of fixed-income securities and financial derivatives, structural design principle is embedded in some sort of financial derivatives on the basis of fixed-income securities (mainly various option) linked to the volatility of interest rates, exchange rates, price index, the subject of or linked to the credit standing of an economic entity, making the product the purchaser is able to bear certain risks on the basis of higher income. Structured financial products through the fixed-income products and options, making the investment income associated underlying asset price fluctuations linked to earn a higher rate of return on investment in the protection of principal. The same time, due to the wide variety of structured financial products linked to the subject, and the terms of the design of complex, ordinary investors is often difficult to judge their true income status. Although many Chinese banks frequently offer structured financial products, but also simply to make the middle of the difference as a sales channel, not mastered the core technology of the product design, pricing, and risk management. Since the beginning of this year, by the impact of the international financial crisis, some maturity structured financial products frequently burst zero income or negative income phenomenon, these products are, without exception, been implicated for their participation in the international capital markets and commodity markets, and the consequent investors, the issue of bank supervisory authorities focus on the structural design of structured financial products, pricing and risk management. Income poor condition based on structured financial products in order to reduce the risk of expanding investment, the regulatory authorities on the issue of bank supervision and scale are increasing. July 8, 2009, the China Banking Regulatory Commission issued the \overly complex financial products. This means that the future risk of structured financial products will increasingly low, will also no longer possible to structure complex financial products. This article to commercial banks to launch structured financial products as research subjects were analyzed, with a focus on equity-linked structured bank financial products, combined with specific product examples to explore the commercial bank structured financial product design, pricing, technical principles and basic processes, use of the Monte-Carlo simulation method, simulation pricing on selected products, compared to analog computing from the theoretical value and the issue price of the real products, and the reasonableness of the pricing of such products, as well as the cost of the banks and investors, income further detailed analysis and interpretation. Finally, a comprehensive analysis of structured financial products in the development of our country, the problems and the reasons, as well as the development of ideas and policy recommendations. And other structured products, structured financial products available to investors to share in the full or part of the guaranteed safety of principal premise of international financial markets, high income opportunities. At the same time, it is also a higher demand on the issue of pricing and risk management capabilities, as well as financial management capacity of the regulatory authorities. Through in-depth study of the design of structured financial products, pricing and risk management for enhanced structural financial markets of the participating party risk awareness, and improve the innovation capacity of the state-owned banks has positive significance, as well as the financial regulatory authorities supervision on the part of the business of commercial banks to provide a reference. Chapter 1 is an introduction, introduces the research background, significance, research framework and methods, as well as a literature review on the pricing of structured financial products. In recent years, with the growth of China's personal wealth and financial awareness enhancement, commercial banks gradually discovered the tremendous opportunities in the personal financial services market, more and more attention to the pioneering of the personal financial services market. On the other hand, investors' demand for security and profitability also prompted the banks to continue to develop new financial products. Structured financial products have emerged, it has the coexistence of profitability and risk characteristics, has become the fastest growing scale in today's international financial markets, Financial Services, one of the most potential. Structured wealth management business with its huge market power, not only into the various Chinese banks horizons, also continue to attract foreign banks vied for a piece of the market for domestic commercial banks to meet the challenges brought about by the financial markets opening up and development provides new opportunities. Chapter 2 Overview of structured financial products, introduces definition and classification of structured financial products. The so-called structured financial products, in bank deposits, zero-coupon bonds and other fixed-income products based on the use of financial engineering of the fixed-income products and financial derivatives combination of a new type of financial product. It actually is a fixed-income product portfolio option, on the one hand, the part of the principal invested in fixed income products to achieve capital preservation, on the other hand will yield financial products and the price volatility of the underlying asset is linked, in the protection of The principal at the same time get a higher rate of return on investment. The product classification point of view, the structural financial products is wide variety of the RMB structured financial products and foreign exchange of structured financial products can be divided in accordance with the investment currency; linked to the underlying assets can be divided into the interest rate linked financial products, credit-linked financial products type of commodity-linked financial products, the exchange rate linked to type financial products, equity-linked financial products; guarantee income types can be divided into income financial products and non-guaranteed income financial products. Chapter 3 studies the stock pricing principles of structured financial products linked to type. The pricing of basic logic is: the first product split, then each part pricing and final pricing of the various parts of the results plus total, the overall price of the structured financial products. Firstly decomposition to structured financial products for fixed income and options part, an attempt to use binary tree model to quantify pricing. The fixed-income portion of the pricing is relatively simple, generally based on the issue of structured financial products and product investment period match time deposit rate, calculated using a discounted cash flow method. Option component pricing is set according to the product terms to be calculated using the Black-Scholes model or Monte-Carlo simulation method. Part of the options we have analytical solution formula parameter values, we can calculate the value of the option is simply a reasonable estimate based on market conditions, while for others more complex structure options, you need to use the computer of the future of the underlying asset may price movements to simulate. In product pricing, theoretically by added to the price of each part, we can get the price of the structured financial products. Chapter 4 Everbright Bank of \Calculate the theoretical value of the product according to the method described in Chapter 3, the model calculated theoretical value products actual issue price comparison, we found that the products are issued at a premium, for investors, higher risk, and for banks exist at issue gains. In fact, most of the market price of the structured financial products is higher than the theoretical value. The main reason to include three aspects: First, financial product issuers will inevitably produce some issue expenses need to be issued at a premium assessed; Second, bring some unique and innovative financial products will issue bank premium linked to the concept of the Olympic Games, as pioneered products; Finally, due to the complexity of the structure of financial products, banks require a certain amount of funds to design hedging measures. Chapter 5 describes the structured financial products in the development of our country, the problems and the reasons, as well as the development of ideas and policy recommendations. Structured financial products market in China started late, mainly there is a serious problem of product homogeneity, transparency, the lack of use of funds of commercial banks in the international market, the relatively weak domestic commercial bank's own internal control construction and risk management capabilities, business The Banking Service awareness needs to be improved, as well as the lack of investor expertise and other issues. For the above problem, this paper issued by banks and regulatory authorities, respectively, proposed the corresponding recommendations: to improve the core competitiveness of financial derivative products; breakthrough in the development of personalized products to meet investor demand for hierarchical; enhanced domestic commercial banks on derivatives risk control capability; training and the introduction of financial derivatives trading and risk management personnel to enhance the level of integrated financial services; strengthen and standardize management, attention to information disclosure.

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