Research ArticleOpen AccessGoogle Scholar indexed
Valuation of Certificates on a Straddle with Forward Start—Theory and Evidence
Accounting, Finance and Business Law Department, Radford University, Radford, USA
Finance Department, Towson University, Towson, USA
- 1 Accounting, Finance and Business Law Department, Radford University, Radford, USA
- 2 Finance Department, Towson University, Towson, USA
Theoretical Economics Letters·Volume 04 (2014)·Pages 341–349·Published 9 June 2014·DOI10.4236/tel.2014.45045
Copy link · social · email
Abstract
This paper introduces a new financial product named Certificates on a Straddle with Forward Start and provides detailed descriptions of the product specifications. It shows that the payoff of a Certificate on a Straddle with Forward Start can be duplicated by the combination of long positions in call and put options on the underlying asset. A pricing formula is developed to price the certificates. A certificate issued by Credit Suisse is presented as an example to examine how well the model fits empirical data. The results show that issuing Certificates on a Straddle with Forward Start is a profitable business and the results are in line with previous studies pricing other structured products.
KeywordsStraddleForward Start OptionsOption PricingStructured ProductsFinancial Innovation
- Das, S. (2001) Structured Products and Hybrid Securities. John Wiley & Sons Ltd., Singapore.
- Hernandez, R., Lee, W. and Liu, P. (2010) An Economic Analysis of the Japanese Reverse Exchangeable Market. Advances in Financial Planning and Forecasting, 4, 159-191.
- Hernandez, R., Lee, W., Liu, P. and Dai, T. (2013) Outperformance Certificates: Analysis, Pricing, Interpretation, and Performance. Review of Quantitative Finance and Accounting, 40, 691-713. http://dx.doi.org/10.1007/s11156-012-0294-z
- Isakov, D. (2007) Le prix élevé de certains instruments tient aux frictions qui apparaissentsur le marché. Le Temps.
- Laise, E. (2006) An Arcane Investment Hits Main Street. Wall Street Journal (Eastern Edition), 247, D1-D3.
- Lyon, P. (2005) Editor’s Letter: The NASD Guidance Does Seem to Suggest That Structured Products Should Be the Preserve of the Privileged Few Who Are Eligible for Options Trading. Structured Products.
- Maxey, D. (2006) Market Builds for Structured Products. Wall Street Journal (Eastern Edition).
- National Association of Securities Dealer (2005) Notice to Members 05-59 Guidance Concerning the Sale of Structured Products. NASD, New York.
- Ricks, T. (1988) SEC Chief Calls Some Financial Products Too Dangerous’ for Individual Investors. Wall Street Journal, 1.
- Simmons, J. (2006) Derivatives Dynamo. Bloomberg Markets, 55-60.
- Rubinstein, M. (1991) Forward Start Options: Published as “Pay Now, Choose Later”. Risk Magazine, 4, 13.
- Hull, J. (2003) Options, Futures, and Other Derivatives. Pearson Education Inc., Upper Saddle River.
- Abken, P. (1989) A Survey and Analysis of Index-Linked Certificates of Deposit. Working Paper—Federal Reserve Bank of Atlanta, Atlanta, 89.
- Baubonis, C., Gastineau, G. and Purcell, D. (1993) The Banker’s Guide to Equity-Linked Certificates of Deposit. Journal of Derivatives, 1, 87-95. http://dx.doi.org/10.3905/jod.1993.407880
- Benet, B., Giannetti, A. and Pissaris, S. (2006) Gains from Structured Product Markets: The Case of Reverse-Exchangeable Securities (RES). Journal of Banking and Finance, 30, 111-132. http://dx.doi.org/10.1016/j.jbankfin.2005.01.008
- Black, F. and Scholes M. (1973) The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81, 637-654. http://dx.doi.org/10.1086/260062