The market for retail investment products is traditionally dominated by saving deposits, various types of funds, and life insurance products. The liberalization of the capital market in the 1990s and the foundation of option exchanges gave more investors access to derivative products. Financial institutions started to manufacture investment products as a combination of zero-coupon bonds or shares and derivatives. Structured equity products are "wrapped" into bond-like structures, receive security identification numbers, and are traded on regulated markets. Issuers quote bid and ask prices to make the products available for buying and selling activities. Investors pay a notional amount upfront in the form of a lump sum and get access to payoff profiles otherwise not offered in the private wealth management market. Financial institutions distribute the structured equity products through their retail advisory channels in which intermediaries give personal advice to retail clients about the attractiveness of products. The financial market crises in the year 2008 made several poor selling practices evident and revealed the existence of questionable structured equity products in the wealth management of financial institutions. The lack of strict governance rules in the issuing process of structured equity products became apparent. Financial institutions were criticized for making structured equity products artificially complex, overpricing products, betting against clients’ risk positions and designing products for implementing a wealth transfer model from retail clients to financial institutions.
Table of Contents
- Introduction
- The problem
- Research gaps and objectives
- Structure and methods
- Design possibilities of structured equity products
- Introduction
- Overview of structured equity products
- Capital protected certificates
- Yield enhancement certificates
- Participation certificates
- Design calculus
- Budget constraints
- Risk-neutral option theory
- Base model
- Interest rate proceeds as budget constraints
- Dividend proceeds as budget constraints
- Product launch possibilities
- Capital protected certificates
- Yield enhancement certificates
- Participation certificates
- Design preferences of issuers
- Products with budget constraints
- Budget and option price sensitivities
- Margin ceiling
- Design of n-year products
- Products without budget contraints
- Premium income
- Design of n-year products
- Products with budget constraints
- Result
- Discussion
- Hedging discipline of issuers
- Introduction
- Limit policy
- Limit utilization
- Position limits at issue day
- Dynamic loss limits
- Intraday stop loss limits
- Methods to measure option risk
- Limit setting for option trade positions
- Simulating option risk
- Research design
- Option theoretical approach
- The cost of limit violations
- Result of experiment
- Historical simulation
- Historical data set
- Results of historical simulations
- Option theoretical approach
- Result
- Discussion
- Structured equity products from the retail client's perspective
- Introduction
- Choice under risk
- Departure from expected utility theory (EUT)
- Functional forms of probability weighting functions
- One parameter probability weighting functions
- Two parameter probability weighting functions
- Delay dependent probability weighting functions
- Desirability study for structured equity products
- The model
- Research design
- Desirability of stocks and risk-free assets
- Desirability of capital protected products
- Desirability of yield enhancement products
- Desirability of participation products
- Result
- Discussion
Objectives and Key Themes
This dissertation investigates the design and hedging of structured equity products in the wealth management market, considering both the issuer's and the retail client's perspective. It aims to bridge the gap between the theoretical framework of option pricing and the practical considerations of product design and risk management in this specific financial context.
- The design and pricing of structured equity products
- The hedging behavior of issuers in managing the risks associated with these products
- The investment preferences of retail clients and their perception of these products
- The interplay between issuer preferences, hedging strategies, and client preferences in shaping the market for structured equity products
- The role of utility theory and behavioral finance in understanding investor decision-making in this context
Chapter Summaries
- Introduction: This chapter sets the stage by introducing the problem of designing structured equity products for retail clients in the wealth management market. It outlines the research gaps and objectives of the dissertation, and explains the structure and methods used in the study.
- Design possibilities of structured equity products: This chapter provides an overview of the various types of structured equity products, including capital protected certificates, yield enhancement certificates, and participation certificates. It then delves into the design calculus of these products, considering budget constraints, risk-neutral option theory, and different product launch possibilities. The chapter also examines the design preferences of issuers, exploring the influence of factors such as budget constraints, option price sensitivities, and margin ceilings on their product design choices.
- Hedging discipline of issuers: This chapter investigates the hedging strategies employed by issuers to manage the risk associated with structured equity products. It analyzes the limit policy implemented by issuers, examining different types of limit utilization, including position limits at issue day, dynamic loss limits, intraday stop loss limits, and the methods used to measure option risk. The chapter further explores the research design and results of both option theoretical and historical simulation approaches to analyze the effectiveness of hedging strategies.
- Structured equity products from the retail client's perspective: This chapter focuses on the retail client's perspective on structured equity products, examining their investment preferences and decision-making processes. It explores the departure from expected utility theory in understanding client behavior, considering the role of probability weighting functions and prospect theory. The chapter then presents a desirability study that investigates the attractiveness of different structured equity products to retail clients, analyzing the results of the study to provide insights into client preferences and risk appetite.
Keywords
Structured equity products, wealth management, option pricing, risk management, hedging, retail clients, investment preferences, behavioral finance, prospect theory, probability weighting functions, design calculus, budget constraints, issuer margins, limit policy, dynamic loss limits, intraday stop loss limits, historical simulation, option risk, desirability study.
- Arbeit zitieren
- Stefan Modrow (Autor:in), 2017, Involving the Question of Utility for the Design of Structured Equity Products in the Wealth Management Market, München, GRIN Verlag, https://www.grin.com/document/441101
