Monte Carlo Pricing Method For Rate-linked Triggered Structured Bonds

As the U.S. subprime mortgage crisis, in order to avoid excessive economic decline ,governments in all the country adopted different degree of stimulus polices.So quantitative monetary policy and lower interest rates became the best method to investors immediately, but it is a wealth of erosion, they urgently needs to take measures to realize their wealth increment. In China,in the circumstances of the lack of investment channels,investors hope the safety of fund investment when the trend of market became down and share the benefits when the trend of market became up,but it is more difficult.This provide good market environment to rate-linked triggered structured product.However, with the bank financing products in the adverse circumstance becoming zero income,traditional and pricing method not only can assume to its accurate, and the pricing is both reasonable investment hedging strategy.Therefore, the study of price rate-linked triggered structured products for development and risk management of our bank has important theoretical and practical significance.Firstly,triggered structured products is a kind of special structural products with certain trigger boundary conditions.Through introduced the properties and characteristics of the ,the author get the boundary conditions given execution portion.Based on the complexity of the interest rate and the subject, utilizing the analytical solution method multidimensionality or binary tree and finite difference method for pricing exist certain difficulty, it is necessary to use the characteristic with parallel simulation monte carlo method to price rate-linked triggered structured products.Secondly,this paper combinate the volatility of Heston model and simulate SHIBOR rate on the basis of the effort of previous. And on this basis, using the method of Milsten discrete.Therefore, in this article we mainly do the following job:first,based on the actual feature of SHIBOR rate,we chose CKLS as its research interest rate model.In the second place,after compared real interest rates and four volatility model we chose Heston volatility model as the model of the volatility.Third,we introduced Milsten discrete method on the base of euler method,which is the method increase the number of order of euler method.The simulation results show:compared with euler method, Milsten discrete method has greatly improvement in precision and in convergence speed.Thirdly,using the improved discrete method and markov chain monte carlo (MCMC) method,we carries on the corresponding empirical research and analysis about RMB 3 months SHIBOR rate-liked structured product issued by Beijing bank.In the final the reason is:under the situation of 100,000 par value,the value of zero coupon bonds for 991029.52, options for 482.38 part value.So the theoretical value of this product is the sum of both,which is 99919.48, this value is less than its 100,000 par value.If investors buy this product,they will face losses to a certain extent,though the risk is very small.Finally,on the basis of pricing rate-linked triggered structured product,we select the initial forward rate, the risk-free rate and stochastic volatility volatility three parameters carry on sensitivity analysis, which can calculated and analyzed influence of theoretical value when above parameters change and the relationship between above parameters and theoretical value of products.The conclusion is:on one hand,when parameter changes,the value of product changes little.All this reflect the model is stability and practical to the certain extent.On the other hand, investors and issuers need carry on different investment strategyaccording to the different market environment .Through reading the domestic and foreign literatures ,research the theory and simulate the model,we can conclude:first, with future rates fluctuate frequently,rate-linked triggered structured product with protect value characteristics has become the future development of structured finance product bank.Secondly, CKLS model with Henston stochastic volatility can better describe SHIBOR rates, show more excellent accuracy.Moreover, using Milsten discrete method can descript model of interest rate movements more accurate . Finally, using the monte carlo method is easy to price products precisely.