TITLE:
Valuation of Certificates on a Straddle with Forward Start—Theory and Evidence
AUTHORS:
Rodrigo Hernandez, Yinying Shao
KEYWORDS:
Straddle, Forward Start Options, Option Pricing, Structured Products, Financial Innovation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.5,
June
9,
2014
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.