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Pricing Research of Structured Financial Products with Trigger Conditions

Author: LiuZongLiang
Tutor: DiLiHong
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Trigger conditions structured financial products pricing Monte Carlo simulation Cholesky decomposition
CLC: F832.2
Type: Master's thesis
Year: 2013
Downloads: 94
Quote: 0
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Since2001, Chinese family wealth growth speed has been improved obviously, accompanied by deposit interest rates gradually lower, families’demand for financial products increase sharply. Among these days, the entire capital market has enriched themselves in several times, and the emergence of structured financial products, in particular, has brought radical changes to the whole capital market. The most important features of structured financial products is based on capital protection and possibly high yield in future. The structured financial products’ diversification makes investors more curiosity, more easily recognized by the market. Practice, people come to realize that the new structured financial products can meet their risk appetites, and the products’other features can make themselves satisfied. Thus, the study of structured financial products has become popular in recent years, the hot topic this paper study is the equity-linked structured products with trigger conditions.I discovered that most scholars in the field of structured financial products is still mainly focus on the summarized introduction, horizontal comparison, the risk of revealing, policy proposals and so on, the articles focus on pricing are not many. At the same time, foreign scholars, Hong Kong and Taiwan scholars pay more attention to the pricing, which needs financial engineering arbitrage analysis, securities replication skills and computer simulation techniques to study for more practical value.This article studies the content revenue function, the derivation of the pricing formula of structured financial products with trigger conditions, I use Monte Carlo simulation techniques to estimate precise price. Studies need to establish a number of theoretical assumptions, the assumptions of this paper are mainly a series of basic assumptions in the Black-Scholes model. This paper studies the idea is to relax the assumption to gradually derive more complex product pricing formula, and explain the reasons. In addition, the article also pointed out that the contents the author cannot be solved on the level of my understanding, I hope later researchers can solve the problem.I find that some small flaws pricing in the existing literature, such as, other researchers did not take into account the decomposition matrix need to do standardized transformation when doing Cholesky decomposition. If the matrix is not standardized, it will result in serious deviation from the variance of the Wiener process. Therefore, I will correct this wrong, and put forward the amended theory and Cholesky decomposition matrix transformation formula.The overall structure of this article can be divided into three parts, the first part is the first three chapters, the second part is divided into Chapter4, Chapter5and Chapter6, the third part contains Chapter7and Chapter8. Chapter6and Chapter7are the core contents of this article.One of the innovations of this paper is this paper is the research object, multi-asset equity-linked structured products with the trigger conditions. The other one is the paper found Cholesky decomposition parameter needs to do Matrix transformations. For failing to solve the problem Vasicek interest rate model in my revenue function, it has potential to deduce the deviation. In order to compensate the errors, I choose several discount rate instead of single discount rate, for the reason that the interest rate term structure can influence the discount problem. Therefore we must consider the impact of the theoretical price, without using stochastic interest rate model case with segmented SHIBOR interest rate as the risk-free rate.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Banking system and business
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