VaR in equity-linked financial products revenue and Risk Measurement Applications
|School||Yunnan University of Finance|
|Keywords||Equity-linked financial products Structured financial products VaR Monte Carlo simulation|
In the background of financial globalization, both Chinese banks and foreign banks have set foot in China’s financial market,in which equity-linked products have accounted for a certain proportion. The equity-linked product is one type of the structured financial product, and part of its income is fixed, the other part is depended on the performance of the single stock, the stock portfolio or the stock price index. The first equity-linked product was born in the American market in 1980’s,and then gradually developed into European and Asian.In China, the time it has appeared is not long, but the developing is very rapidly. Now its investment currency, linked way, the listed place of underlying assets, the calculation method of income and the settlement of principal and interest, etc., have become diversified.It can be said to "a hundred schools of thought strive or a hundred flowers bloom ". The product provides a new way for investors to manage finances and increases the income of intermediate business for issuers,but because of its complex design,incomplete information disclosure and harsh provisions,which has also caused many phenomena of zero or even negative income. The evaluation of these products has been drawn out.The full name of VaR is“Value at Risk”, which was born in the practice of JP.Morgan’s risk management in 1990’s. VaR technique is used widely since it was born,and now has already become the major technique to measure the international market risk.There have been many methods to calculate VaR, the main are:historical simulation, Monte Carlo simulation and variance-covariance method. In this paper, using VaR to measure the return and risk of equity-linked financial products is the first time.VaR itself is just a measure of risk, but in the calculation of VaR often need the distribution of return on assets.So calculating VaR plays double benefit. VaR can not only make investors have a more accurate grasp on the expected return of financial products,but also make them assess risk according to their risk tolerance. In the case that the existing evaluation methods of the return and risk of financial products are scarce, VaR method provides an idea, which is an expansion of the field, and also the foundation for further research.This paper will both use theoretical research and empirical research,and be divided into five sections:The first chapter is the introduction, mainly expounds the background and significance of the research, domestic and foreign research dynamic, the idea of this paper and the basic framework.The second chapter and the third chapter are the theoretical part of this paper, will respectively describe the rise, development, characteristics, classification, and basic elements of equity-linked financial products and the development, definitions, characteristics, and calculation methods of VaR.The fourth chapter is the empirical part,first it makes a qualitative introduction of the benefits and risks of equity-linked financial products, puts forward using Monte Carlo simulation to calculat VaR in the empirical part, and then selects three equity-linked Financial products with different return characteristics to obtain their probability distribution of return and VaR,using MATLAB programming.After the empirical analysis, we draw that most financial products have investment value, or at least can obtain the opportunity return which is equal to the time value of money. But a few products did not consider from a practical angle of investors , thus the phenomenon of zero income appeared, if we consider the opportunity return, in fact, negative income.In the final of this chapter,we propose some errors of using VaR method on the evaluation of financial products;The fifth chapter is the conclusion of the paper,which is the summary of above four chapters.And it proposes different suggestions for issuers, investors and authorities.