Fair Pricing of Equity-linked Notes
(2016) NEKP03 20161Department of Economics
- Abstract
- Following evidence of overpricing in structured products, I develop a comprehensive framework for pricing Equity-linked notes (ELNs). My model, unlike previous research, accounts for both the bank's actual funding costs and counterparty credit risk. I also allow for Asian payoffs in the derivative part — a feature now standard in ELN issuances. Studying a sample of eight ELNs issued by a Swedish bank during 2011 I find evidence of significant overpricing. Premia at time of issuance were on average 5.58% ranging between 2.53% and 10.54%. Additionally, when considering the full contract term I found significant average premia in bid quotes provided by the bank to markets of the same size. I finally conjecture that imbalances and fluctuations... (More)
- Following evidence of overpricing in structured products, I develop a comprehensive framework for pricing Equity-linked notes (ELNs). My model, unlike previous research, accounts for both the bank's actual funding costs and counterparty credit risk. I also allow for Asian payoffs in the derivative part — a feature now standard in ELN issuances. Studying a sample of eight ELNs issued by a Swedish bank during 2011 I find evidence of significant overpricing. Premia at time of issuance were on average 5.58% ranging between 2.53% and 10.54%. Additionally, when considering the full contract term I found significant average premia in bid quotes provided by the bank to markets of the same size. I finally conjecture that imbalances and fluctuations in directions of trade flows could create incentives for banks to skew both bid- and offer quotes to lower levels, especially early in contract terms. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/8893572
- author
- Reneby, Alexander LU
- supervisor
- organization
- course
- NEKP03 20161
- year
- 2016
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Fair pricing, structured products, equity-linked notes, stochastic volatility
- language
- English
- id
- 8893572
- date added to LUP
- 2016-10-28 15:16:03
- date last changed
- 2016-10-28 15:16:03
@misc{8893572, abstract = {{Following evidence of overpricing in structured products, I develop a comprehensive framework for pricing Equity-linked notes (ELNs). My model, unlike previous research, accounts for both the bank's actual funding costs and counterparty credit risk. I also allow for Asian payoffs in the derivative part — a feature now standard in ELN issuances. Studying a sample of eight ELNs issued by a Swedish bank during 2011 I find evidence of significant overpricing. Premia at time of issuance were on average 5.58% ranging between 2.53% and 10.54%. Additionally, when considering the full contract term I found significant average premia in bid quotes provided by the bank to markets of the same size. I finally conjecture that imbalances and fluctuations in directions of trade flows could create incentives for banks to skew both bid- and offer quotes to lower levels, especially early in contract terms.}}, author = {{Reneby, Alexander}}, language = {{eng}}, note = {{Student Paper}}, title = {{Fair Pricing of Equity-linked Notes}}, year = {{2016}}, }