The Design Of Structured Fund Arbitrage Strategy Based On Monte-Carlo Simulation

As Chinese financial innovation increasingly advanced, the structured fund has gradually become an important part of Chinese fund market. Structured fund is a fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds use fixed-income secu-rities to give the fund capital protection through principal repayment along with the added gain of interest payments. The fund uses options, futures and other derivatives, which are often based on market indexes, to provide exposure to capital appreciation. These products are attractive to investors looking for downside protection who would also like to see gains from upside movements in the markets. Depending on the fund, the exact products and guarantees will vary. A typical structured fund enters into an over-the-counter index-linked swap with a financial institution that acts as the swap counterparty. A swap is an investment instrument which enables two parties to ex-change their assets or cash flows. A swap can be either funded or unfunded. Through the swap, the fund receives the investment returns based on the performance of the underlying index. Underlying all structured investments are securities that are part of the capital markets. The risk and the performance of structured investments are inevi-tably determined by the investments upon which these complex securities are based, not the financial engineering. Complex investments may have risks that are not appar- ent, or easy to understand. As a result, it might be difficult to determine how the invest-ment will make money. But fortunately, structured fund can be traded, which will ena-ble the NPV of the main share and the price of sub-share are different, and this differ-ence can be used as an opportunity for arbitrager. Arbitrager can rely on the correspond-ing pairing conversion mechanism to earn income. Arbitrage is the simultaneous pur-chase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market ineffi-ciencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. A computer program used to place simultaneous orders for NPV and price of Structured Fund, usually for large volume, institutional trades. The ATP attempts to exploit price variations through a process called "Structured fund arbitrage."In recent years, the amount and type of classification fund increase rapidly, and classification of the fund is welcomed by the majority of investors because of its unique design mechanisms. However, the complicated structure design of the structured fund and the implementation of the arbitrage strategy become an obstacle of the arbitraging for the majority of investors. In order to provide investors with some good advice to choose the right arbitrary strategy, this paper will test three dominant strategies and use Monte-Carlo simulation method to rectify the strategy.Due to the classification of the fund from foreign structured financial products. Therefore, on the basis of the domestic and foreign literature, this paper not only sum-marized the brief original history and the evolution of structured financial products in foreign countries, but also summarized the classification of the fund in the financial market of our country and the development from a systematic overview. Next this paper presents the design terms and characteristics of the classification of the fund. It mainly includes the classification of fund raising and works, income distribution way, leverage multiples and conversion mechanism. Leverage multiples includes initial leverage and net leverage, conversion mechanism contains maturity translation and point conversion. And then, this paper has summarized three basic fund arbitrage strategy-subscription arbitrage strategy, redemption arbitrage strategy and discount arbitrage strategy. Con-sidering the pricing problem for each part whose volatility is a random process. I choose the Monte-Carlo method to pricing the funds. Subsequently, based on the daily loga-rithmic return rate distribution of three types of fund shares in 2015, this paper use Monte-Carlo simulation method to realize the valuation of the structured fund.After in-depth study of the fund structure and the arbitrage strategy, the following conclusions are drawn:firstly, the structure design of fund products will indirectly af-fect the operation of the arbitrage strategy. For example, discount threshold setting de-termines the frequency of discount, thus affecting discount arbitrage strategy. Secondly, the accuracy of the valuation of three shares will affect the implementation of the arbi-trage strategy. After test the fund accumulated net logarithmic return rate of three type fund shares of 50 samples, I found that most of the A share trading price of logarithmic return rate meet the normal distribution, and only a small part of the main share’s and B share’s trading price of the logarithmic return rate to meet the normal distribution. This result shows that Monte-Carlo simulation method is more useful for most A share to make an accurate valuation of the transaction, but for the B share and the main share, this method is not perfect. The reason can be summarized as follows. On the one hand, because of China’s stock index return rate distribution does not accord with normal distribution. Therefore, the direct use of Monte-Carlo simulation method based on Ge-ometric Brownian motion model may lead to the distortion. On the other hand, due to the implementation of the Chinese stock market, price limit rule has an effect on B share’s trading price of the logarithmic return rate. Therefore, B share’s trading price which under the action of a leverage will often touched upon price limits, resulting in the income distribution system interference and distortion. Thirdly, the most part of A Share fit in with the normal distribution, and only a small part of main share and B share fit in with it. This shows that Monte-Carlo simulation method could be used for the valuation of most A share, but it’s not a good idea for the B share and the main share. Finally, use Monte-Carlo simulation method to rectify the strategy. Through the establishment of the rectification, the arbitrage can be carried out under the risk con-trollable range.