Domestic Research On Structured Financial Products Design And Pricing

With the domestic financial markets continue to grow and develop, the awareness of the personal investment is increasingly awakening and the financial needs of individual customers is greatly enhanced. In such background, the amount of financial products is growing rapidly. The structured products of commercial bank with their unique risk-return characteristics compose an important part of the domestic financial market.Basically, structured products are combinations of fixed income securities and financial derivativities.Fixed income securities include deposit, interbank lending and domestic inter-bank market investment Financial derivatives are based on a variety of options and swaps.Because of Involving financial derivatives, structured products are usually complex. Because individual customers know little about the financial derivatives, and many customers blindly invest in these products without understanding product features.When buying structured products, they often pay one-sided attention to high rates of potential return. When the actual performance of the market is inconsistent with products design, and therefore those products mature with zero or even negative, customers can not understand the results. As a result,structured products in the domestic market are treated as financial poison since2007,leading to the shrinkage of both the size and the tranche amount of structured products. Local banks suspended such business, and turned to carry out the trust-cooperation products. The status of domestic structured products, on the one hand, is because of investors immature.On the other hand, the issuers are also to blame. Recalling many products, we can find a lot of unreasonable design, which the potential risk withstood by the investor is much higher than the potential gain.Through backing test, the possibilities of some products with zero return are more than80%, which is undoubtedly the design defect. In fact, from the viewpoint of characteristics, the design of structured products is precisely a big advantage compared to other products.Well-designed structured products can be tailored according to not only different market environments but also the risk-return preferences of different customers with good returns. Precisely because of this, one of the research focus of this article is the design of the structured products, starting with the most basic option blocks.The characteristics of the return curve and the sensitivity for the various market factors are highlighted and some popular structures are decomposed.The function of the option blocks will de discussed.In the end of the product design part,I will try to design a product,which is accommodated to the domestic market and will do the backing test and scenario analysis.The other focus is on the pricing of the structured products. Due to the nature of structured products is a combination of fixed income products and financial derivatives, its pricing is mainly conducted by these two parts. The fixed income portion of this article use the discounted cash flow model and the key points are the selection of the discount rate and the term structure of interest rate. As for the pricing of financial derivatives part, this paper introduces the BS model, the binary tree model and Monte Carlo simulation,which are the three most commonly used method.The scope of the pricing effects, parameters selection and the pricing accuracy will be discussed.In the end of this part,some popular products in the market will be priced to check whether they are reasonable or not...