Structured Product Design: Product Pricing And Risk Hedging

Structured equity products (SEPs) typically have payoffs based on theperformance of an individual stock, a basket of stocks or a stock index. The payoff canbe divided into the fixed income part and the option part, which is able to cater to theneed of investors by replacing the usual payment features of a traditional security withstate-contingent payoffs tailored to the needs of specific investors. Structured productoriginated from1980s in the US market, became popular in early1990s in the Europeanmarket and gradually got accepted by the Asian market in late1990s.Despite the booming market for structured products, foreign financial institutionsstill dominate SEPs issues in the Chinese market. Many SEPs issued by Chinesecommercial banks are purchased from foreign banks, and it is those overseas bankswho are the actual issuers and managers. As a result, domestic banks still lack theinsight into the design and development of SEPs. So research on the design, pricingand risk management of structured products has both theoretical value andcontemporary relevance for the Chinese market.In contract to existing researches in China that are primarily theoretical, thisresearch focuses on the operational details of structured products. Specifically, anextensive study and an in-depth analysis of structured product are provided, especiallyin terms of pricing techniques and risk management mechanism. Product pricing withMonte-Carlo simulation and Delta hedging is illustrated to help Chinese financialinstitutions and investors to gain deeper insight into structured products. In addition,the research also offers an A-share linked structured equity product design scheme,which enables investors to diversify their investment portfolios and enriches theChinese SEPs market, as opposed to existing products that are linked predominantly tothe H shares.