The Design,Pricing,and Risk Management Of Equity-linked Structured Products

Financial risks are increasing and international competitions are becoming increasingly fierce in the tide of the economic globalization and financial liberalization. Financial institutions continue to innovate and improve core competitiveness in order to reduce risks and develop the enterprise.There is a great demand for equity-linked structured products in the market. Contemporarily, investors are willing to invest into structured products whose risk and return are between bank deposits and stocks under the conditions of the high risk of stock market, the actual zero or negative rate of returns to investors due to the low bank interest rates and a higher inflation. Equity-linked structured products with the characteristics of capital-protection and speculation, could guarantee the capital with the wrong prediction of market trend and make profit with the correct prediction of market trend. Morever, regulators and issuers want to develop structured products to improve the levels of financial management and service. Therefore, the development and prosperity of Equity-linked structured products is the general trend.There exist some problems which are the homogeneity seriously in the design, lack of payoff protection and many risks of structured products.The main reasons are the low levels of design, pricing and risk management of structured products. The existed probles could be solved by the correct analysis method and the corresponding engineering technology .This dissertation mainly studied the following four aspects: The first was to study how to design equity-linked structured products based on the design process of financial products; the second was to study how to improve pricing equity-linked structured products based on the numerical method of Monte Carlo simulation; the third was to study how to price equity-linked structured products based on the analytic pricing method of martingale theory; the fourth was to study what were the methods and models of risk management of structured products and what was the process of risk management of equity-linked structured products.There were three main innovations of this dissertation. The first, the dissertation proposed how the issuer initially determined an original payoff function and proposed a design process of equity-linked structured products centered on payoff function according to the process of financial product design, combined with the structure features of the product. 1) An original payoff function was derived from selections of bonds and options after analysis of customer's demand and market environment, and then decomposed the payoff function and preliminarily constructed the structured products, which not only opened the black-box of how to determine the initial structure of equity-linked structured products, but also could finish the prototype design of equity-linked structured products. 2)The dissertation proposed a design process of equity-linked structured products centered on payoff function according to the design process theory,the process of financial product design,the innovative methods ofequity-linked SPs,stock classification and mathematical analysis etc.. A design process centered on payoff funciton of equity-linked structured products included:(1) analyzing market demands; (2) analyzing market environment; (3) selecting the fixed income securities (mainly bonds); (4)selecting derivatives (mainly options); (5) determining and decomposing the payoff function, then constructing the equity-linked structured products;(6) pricing; (7) analyzing risks; (8) standardizing product. And then, the dissertation designed equity-linked structured products embedded by ordinary call option, a bull spread option, asian option and worst of all option respectively. The second, the dissertation studied how to price the multi-asset linked structured products by Monte Carlo method with the modified Cholesky method. There existed correlation among the prices of multiple assets, which affected the pricing results seriously. The dissertation priced equity-linked structured products embedded by worst of all - digital option through Monte Carlo simulations' programs with the modified Cholesky method. The modified Cholesky method standardized the triangular matrix after the decomposition of Cholesky. The empirical result showed that it could improve the accuracy of pricing with the modified Cholesky method. Lastly, the dissertation studied how to price the equity-linked structured products embedded by call-barrier option with the extended Black-Scholes model based on martingale theory. At beginning, the dissertation determined the payoff function of equity-linked structured products embedded by call-barrier option. Then the pricing formula of call-barrier option was simplified by Gisanov conversions of Q and R. The probability of which the maximum price within the time limit was less than the barrier price, the probability of which the maximum price within the time limit was less than the barrier price and the final price was less than the given value, were calculated with Harrison (1985) formula.At last, the dissertation edited programs by MATLAB software and priced the equity-linked structured products embedded by call-digital option. The process and result of empirical test showed that it could be simple and convenient to price the equity-linked structured products with the extended Black-Scholes model based on martingale theory.There were three kinds of limitations in the dissertation as follows:Firstly, although the dissertation solved the problem to designing the protype of equity-linked structured products and proposed a design process of equity-linked structured products centered on payoff function, it did not contain how to set the parameters of SPs and was difficult to meet the complex demands of customers and cope with complex environmental changes, so the further study on parameters setting and innovative design of equity-linked structure products was necessary. Secondly, although the Monte Carlo method with the modified Cholesky method was applied to price the multi-asset linked structured products, the calculation results need to be improved because of the fixed parameters of volatility. Lastly,although the dissertation studied the processes and methods of risk management of the equity-linked structured products preliminarily, there existed limitations in the term of the empirical study due to the lack of cases and data.