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Research on the Pricing of Two Kinds of Equity Linked Products in China

Author ChenSiJing
Tutor JuNengJiu
School Shanghai Jiaotong University
Course Financial
Keywords Equity linked notes PTN IBN Monte Carlo Simulation pricing overpriced
Type Master's thesis
Year 2013
Downloads 22
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Structured notes and equity linked notes only have a short history in China.Popular equity linked notes in China can be divided into three kinds. Researches onthe pricing and hedging of price-triggered return notes or difference related notes arevery rare. The pricing and hedging abilities of domestic institutions are very weakcompared to foreign institutions. This research chose out one price triggered note(PTN) and one indifference-best note (IBN). Monte Carlo simulation was used toassess the return of these products and give correct theoretic prices of them. Theresults showed the PTN was overpriced. Its fair price was$0.9793. To make fairprice to be$1, the triggered rate of every period should be3.73%. The IBN was alsooverpriced. Simulation results showed that the expected return of the product wasonly about0.19%. Without changing the product, its fair price is$0.9772. To makethe fair price to be$1, the ceil rate should be raised to32%. Some productsincluding these two products that brought too low returns or large losses to investorscaused conflicts between banks and investors. Banks should make some change toimprove the situation for their long-term benefits.

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