TITLE:
An Option Pricing Analysis of Exotic Bonus Certificates—The Case of Bonus Certificates PLUS
AUTHORS:
Rodrigo Hernandez, Pu Liu
KEYWORDS:
Bonus Certificates, Option Pricing, Structured Products, Financial Innovation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.5,
June
9,
2014
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.