Research To The Structured Mutual Fund Pricing In China

Structured mutual fund is a newly developed structured product in China, which divides the fund into two parts with different return and risk characteristics. We consider the pricing problem for each part whose volatility is a random process. According to the income distribution terms, each part of the fund can be decomposed to call options, put options, and risk free bond. Thus we can use the option pricing theory.For comparison, we first apply the Digital Option model to price each part. There are several assumptions behind the Digital Option model, one of which is the constant volatility, which is not the case in reality. Then, we use the Heston model, which is a stochastic volatility model, to price it again. We use options based on FTSE CHINA 25 INDEX to calibrate the parameters.At last, we find the theoretical values are slightly different from the market values. We conclude which is possibly due to the following reasons: calibration process, model accuracy, closed end fund discount and market inefficiency.