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Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Vyacheslav Darsaliya
Design and Evaluation of Structured Financialproducts
Financial Engineering
(Master’s programme)
8
2018
Main purpose of this paper is to conduct a valuation of structured products using Monte Carlo simulation approach. In this research several products with different structure are valued, mainly bonus and discount certificates. Quantitative valuation approach using Monte Carlo simulation allows to estimate present value of the products and compare it to actual prices charged for these products at a time of issuance. Valuation was done on a sample of several products issued by Credit Suisse. Results of quantitative valuation show that on average discount certificates are more overpriced compared to bonus certificates, 4.35% against 3.63%. The difference between present value of the contract and actual price represents a hidden commission that financial institutions embed in the price of a structured product.

Overall every product in the sample was overpriced compared to its present value. This result shows that investors are willing to pay premium for structured products and deem them attractive. Structured products are useful for investors as they are willing to pay premium for them instead of buying other products or even the same products in a bundle separately.

In addition this research allows to draw a conclusion on what type of instrument is more overpriced. Generally more complicated structure of the product implies it is more complicated for the issuer to build the product and then hedge it in the market, which drives costs of the issuance up. Therefore bonus certificates are more overpriced due to more complex structure.

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