An Option Pricing Analysis of Exotic Bonus Certificates—The Case of Bonus Certificates PLUS

Abstract

In this paper we introduce a new financial product named Bonus Certificates PLUS and we provide detailed descriptions of the product specifications. We show that the payoff of a Bonus Certificates PLUS can be duplicated by the combination of a long position in the underlying asset, a short position on zero coupon bonds, a long position in down-and-out call options on the underlying asset, a long position in down-and-in call options on the underlying asset, and a long position in the down-and-out put options. We develop a pricing formula to price the certificates. A sample of ten Bonus Certificates PLUS outstanding on December 2007 is presented as an example to examine how well the model fits empirical data. The profitability in the primary market is examined and the results show that issuing Bonus Certificates PLUS is a profitable business. The results are in line with previous studies pricing other structured products. Finally, we simulate and present the sensitivities of the certificates to changes in different pricing inputs.