A Study On The Equity Linked Products In China's Banking Market

The structured products have grown rapidly in the capital markets of developed countries since 1980's, when the first equity linked product was born in the American market. As one of the relatively new type of financial products, Equity linked products combine the fixed income securities and options. In our country's Hong Kong and Taiwan markets, the equity linked products are also booming. Nowadays, there are a variety of equity linked products being traded in the world's main stock markets, also in the OTC market. This is because the innovative design may provide higher gains than the regular products under the certain risks for the investor, even can provide tailor-made services for the investor, which means it can spread the specific risks.It is until recent years that our country has begun to introduce this kind of new investments, mainly by local and foreign banks. A lot of equity linked products were released in the year of 2006, which was just the start year of a new wave of bull market. As one kind of the new derivation investment tools, the equity linked products have enriched investor's investment choices, and they may satisfy the specific investor's risk preferences. A good prospect for development in domestic market can be foreseen.As the structured products, including equity linked products were firstly invented in the western market; the early researches also mainly came from the foreign scholars. The Taiwan scholars also worked out many pricing models and evaluation methods. However, the domestic scholar's corresponding research is very little. So it is worth to study and discuss the domestic and foreign scholars' research results on the equity linked products, to analyze the principles of design of these kinds of products, to learn the application of the pricing methods and simulate each product, to get the experience from the overseas markets, to unify our country existing market conditions and the capital market reform process, and give suggestions to the development of the equity linked products in our country.This paper includes five parts. The first part is an introduction, mainly gives research backgrounds and the research significances, domestic and foreign research tendency, as well as research mentality and methods this paper applied.The second part firstly introduces the development progress of equity linked products around the world, and enumerates the classical products in the European and American market. Then the author introduces the development condition of equity linked products in our country, which is mainly in forms of equity linked financial products issued by banks. The author then classifies its types. Because there are many essential factor when designing the equity linked products, and each research and development organization may act according to market demand and own conditions, its design has the flexibility and the polytropy, therefore the classified basis also has many kinds.In the third part, the author with emphasis makes the exhaustive elaboration to equity linked product's each essential factor and the principles of design. Then a study on the pricing of the equity linked products is carried. The classical Black - Scholes formula was often used to price an option. Regarding the path dependence options, there is not an analysis formula. So a numerical method can be used, which mainly has three kinds: the binary tree method, the finite difference method and Monte Carlo simulation. The author selects one of the equity linked products in our country's banking market to make a Monte Carlo simulation, also gives possible explanation to the difference of the issue price and the theoretical price.In the fifth part, the author points out the questions existing in out country's market. For instance our country's capital market's foundation is quite weak, the local commercial bank lacks the experience in the operation and the management of structured products. The bank's marketing is imperfect, the market supervision is incomplete, and the design capacity and risk management techniques are not perfect and so on. The author takes a review on the development of the foreign markets and Taiwan and Hong Kong arias' markets, and proposes the experience which can be used for our reference. Finally, in view of each kind of question, the author gives suggestions for a better development in our country.The innovative points in this paper are as follows: the author studies the most recent development of the equity linked products in our country, and uses the numerical method - Monte Carlo simulation, which is internationally commonly used. The author also finds out the newest questions and gives suggestions correspondingly.