Research On The Pricing Of Interest Rate Linked Structured Products

With the increasing of the active domestic financial market,structured products are gradually accepted by investors.Interest rate linked product is a type of structured product,which is composed of fixed-income securities and interest rate derivatives.Interest rate linked product dominates domestic financial market in terms of sales.For financial products,price is undoubtedly an important aspect to concern for buyers and sellers.Therefore,the main purpose of this thesis is to build a model for the pricing of interest rate linked product,so as to carry out fair pricing of such products.Investors buy interest rate linked products primarily for the purpose of profit and avoiding financial risks.Therefore,the first step is to understand this kind of financial products.In this thesis,the product value composition,specific constituent elements,classifications and risks of interest rate linked products will be shown in great details.After analyzing the structure of the interest rate linked products,this thesis constructed a general interest rate linked pricing model including calculating the term structure of interest rate,cash flow decomposition and determination,the pricing progress and sensitivity analysis.LMM market model and Monte Carlo simulation are used to estimate the term structure of the linked interest rate and future cash flows,and finally the theoretical price of the product can be obtained.In the empirical analysis,a range-cumulative interest rate linked product was selected to be priced fairly.Steps of confirming the term structure of the interest rate,estimating the cash flows and then getting the theoretical price are followed.To analyze the factors of price further,sensitivity analysis is employed to analyze three factors:product duration,discounting rate and its volatility.The result of pricing shows that the product sales at discount.So it is worth investing.After conducting sensitivity analysis,conclusions can be drawn that price is positively related with product duration and negatively related with discount rate and its change rate.