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The Design of Financial Structured Product--Pricing and Risk Hedging

Author: QianWenLi
Tutor: LiuYang
School: Southwestern University of Finance and Economics
Course: Financial Engineering
Keywords: Structured Financial Products Option Pricing Risk hedging
CLC: F832.51
Type: Master's thesis
Year: 2009
Downloads: 450
Quote: 1
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Abstract

The late 1980s early 1990s, the world experienced an economic downturn, the stock market downturn situation of declining interest rates, low-profit era so that the \Traditional financing instruments to finance themselves unable to meet the needs of investors, investors want to fall in the market price of capital to ensure the safety of the trend in the market is good and can share the benefits of rising prices. In this case, the structure of financial derivative products have emerged. Structured Products by fixed income securities and derivative contracts are a combination of products, but also can be simply expressed as \It is a fixed income derivatives of an innovation, the use of financial engineering techniques issuers for investment and people of different investment risk preferences, plus options to decompose bond portfolio approach to design high gain or protected structured financial derivative products. The design of structured products are generally guaranteed to get all or part of the principal repayment (bond part), the other part of the proceeds obtained depends on the embedded option value changes. In the international market, the stock market downturn, interest rates continue to decline in the background, this product has been more and more investors of all ages. Of Personal Financial Services business has just started individual investors welcomed by residents in the future also has a huge potential market and development space. But domestic and foreign compared to domestic financial products, whether it is from the analysis of consumer demand, or the design of the product has a certain gap. Domestic banks have issued a large number of overseas targets linked to structured financial products, these products in the domestic release, but the basic investment and risk management outsourcing to foreign investment bank, which makes domestic financial institutions lost pricing power, reduced foreign commission agencies, not only makes the domestic capital outflows also can not control the risks. As can be managed reward, domestic financial institutions to issue the tube enough overseas underlying structured products not only get access to management remuneration fee income and risk management investment income, the vast majority use by foreign investment banks away. And because the presence of a large number of protected terms, domestic financial institutions, but did not reduce the risk. Secondly, the late start, the rapid development of products with the rapid changes that are making investors dazzling, no choice. Third, due to the impact of financial innovation innovative ---- product launches, product changes in the nature; and investment direction change - individual investors' risk appetite as the market changes in the environment has also changed. Most investors are no longer conservative, willing to get a higher income while bear certain risks. Investment preferences change, led to changes in product demand. \annual level of 6.717 billion yuan. China also appeared in several national targets linked structured products, such as hooks CSI 300 China CITIC Bank, China Everbright Bank to share the series, but due to the lack of domestic high-risk hedging tools that allow managers in the management of hedge only first-order risk (DELTA) hedge, managers face a higher risk of error, and because separate operation, different regulatory result, the banks could issue structured products to hedge risks but can not, securities institutions to hedge risk, but can not release products, product distribution management must be very complex multi-stakeholder involvement, leading the parties to find the product enthusiasm is not high. For these problems have forced us deeply, thorough analysis of financial product innovation processes and innovation points, standing on the perspective of the issuer of structured financial products for the design and improvement of domestic financial institutions to obtain greater market competitiveness provide the basis. Also, we need to study the elements of product characteristics and the relationship between the choice for individual investors and investment products provide suggestions for product designers with a variety of elements and gives the expected revenue to provide a reference. This article from the current actual situation of domestic and international markets, a detailed analysis of structured finance product development status, structured types and characteristics of the product, as well as structured products function. As structured financial derivative products in essence is a very personalized products, variety, structural diversity, so the basic research on product pricing is based on a single product or the same type of product-based. From the pricing point of view, the product is generally divided into two parts: the principal part and a portion of the proceeds, according to the principal component and the lowest income areas to deal with the pricing of bonds, floating-rate portion of the appropriate use of option pricing methods. Since each product is different, and it is difficult to find a common pricing models and pricing methods. This article was published on the international market, the more influential of several structured finance products starting a detailed review of agency products in international and domestic research status and research results. Structured financial derivative products is a type of financial instrument, therefore its pricing and risk management are issuers and investors are facing an urgent need to address the issue, but also structured product research the core issues. This article uses a combination of financial engineering decomposition and no-arbitrage equilibrium analysis method, the structured product is decomposed into bonds and options contracts, then use common methods and techniques for its pricing model. As exotic options in a structured product paper focuses on the widespread use of exotic options pricing theory and techniques, and from the perspective of the issuer elaborated issuer risk management hedging approach. Fixed income portion (a fixed-rate debt) commonly used valuation techniques commonly used in fixed income such as internal rate of return method or called discounted cash flow method to pricing, option pricing methods are common during the BS model pricing method, equivalent martingale methods Numerical calculations and Monte Carlo simulation methods. In structured products commonly used barrier options, lookback options, rainbow options and other exotic options, exotic options are relatively standard option in terms of the specific criteria for the classification may change over time and the theoretical development, this paper baking characteristics of its income summarizes the characteristics and classification of exotic options pricing methods. In order to pay interest and the maturity amount, being part of the fixed income hedge, the issuer needs to be funded in part by investors to invest in certain fixed income products, including bonds market instruments and money market instruments, etc., are more zero-coupon bonds and interest-bearing bonds, sometimes also need swaps, forwards and other derivatives, such as interest rate swaps to achieve through the fixed and floating rate income structure conversion. Equity-linked product issuers to investors to buy or sell the option and therefore the need for this option hedge position, including Delta, Gamma, Vega, Rho, Theta and other risks. This article describes the common options risk measurement and risk management practices, in practice for the protection of principal and reduce risk and TPPI CPPI strategies are widely used, especially in the structured product release management to use more, this paper also be elaborated. In conjunction pricing and risk management theory, this paper designed a product linked to the case of A-shares through different design methods and risk hedging method, you can make up, and investors issue will win. Finally, according to China's current development of structured products difficulties faced by some suggestions.

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