Reverse convertible bonds analyzed

Szymanowska, Marta; Horst, Jenke ter; Veld, Chris

doi:10.1002/fut.20397

Cited by 51 publications

(28 citation statements)

References 31 publications

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“…Stoimenov and Wilkens (2005) and Hernandez et al (2007) report average premiums of 4.77% and 5.40% for barrier products, for instance, while simpler products trade at a premium of about 3%. In contrast to these results, Szymanowska et al (2007) find an average overpricing of more than 5% for 32 standard reverse convertibles listed on the Amsterdam Stock Exchange-but the average premium was negative for 43 barrier reverse convertibles (undervaluation of 0.63%). They suspect that investors generally underestimate the value of the put option sold.…”

Section: Literature Reviewcontrasting

confidence: 87%

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Wallmeier

Diethelm

2009

JOD

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The market for structured financial products in Switzerland ranks among the largest in the world. A unique characteristic of the Swiss market is that its most successful products are reverse convertibles on multiple assets with conditional capital protection (multiple barrier reverse convertibles, MBRC). In other countries, an active market only exists for simpler types of reverse convertibles. The valuation of MBRCs is not straightforward, and pricing tools are not yet publicly available. Thus, transparency with respect to fair values might be poor, and it is not obvious that the competition between issuers is strong enough to ensure "fair" pricing. We provide the first empirical study on market pricing of MBRCs based on a comprehensive database of 468 certificates outstanding in April 2007. Using a numerical, tree-based valuation method, we obtain an average overpricing of at least 3.4%. This premium on the entire product corresponds to a price discount of 29% on the embedded short put. The overpricing is positively related to the coupon level, indicating that investors tend to overweight the sure coupon and underestimate the risk involved. This behavioral bias appears to be important in explaining the success of the product.

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Section: Literature Reviewcontrasting

confidence: 87%

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Wallmeier

Diethelm

2009

JOD

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“…Deng et al (2010) report that the average fair value of reverse convertibles was just 93% of the offering price. These findings are consistent with those of Hernández et al (2007), Szymanowska et al (2009) and Henderson and Pearson (2010). Similarly, our analysis of ARBNs in Deng et al (2011) finds that the average fair value of ARBNs in our sample was approximately 95% of the offering price.…”

Section: Introductionsupporting

confidence: 93%

Dual directional structured products

Deng¹,

Dulaney²,

Husson³

et al. 2014

J Deriv Hedge Funds

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We analyze and value dual directional structured products -or simply dual directionals (DDs) -which have been issued in large amounts since the beginning of 2012. DD's evolved out of another type of structured product called absolute return barrier notes (ARBNs); however, DD's lack principal protection and have different embedded options positions, which have yet to be described in the literature. We find that DDs can be broadly organized into two categories: single observation dual directionals (SODDs) and knock-out dual directionals (KODDs). We determine the appropriate option decomposition for these categories and provide analytical formulas for their valuation. We confirm our analytic results using Monte Carlo simulation and use both techniques to value a large sample of DDs registered with the Securities and Exchange Commission up to December 2012. Our results indicate that like many types of structured products, DDs tend to be priced at a significant premium to present value across issuers and underlying securities and that the present value of the decomposition is smaller than the face value net of commissions. We find that DDs with embedded leverage or a single observation feature tend to be worth less than products either without leverage or with a knock-out option.

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“…Elaborate pricing techniques have been developed for increasingly complicated structured products. In addition to this enormous technical literature, several interesting empirical studies have recently been published on the actual market prices of structured products in the US (Benet, et al 2006) and in Europe (Wilkens, et al 2003, Grünbichler & Wohlwend 2005, Stoimenov & Wilkens 2005, Szymanowska, et al 2007, Wilkens & Stoimenov 2007, Wallmeier & Diethelm 2008 . However, no comprehensive studies have yet attempted to understand which types of structured products are attractive for private investors and for what motives, although this topic has recently drawn much attention from a number of papers addressing specific puzzles in this field: Henderson & Pearson (2007) studied empirical differences in popular payoff diagrams between structured products with single stocks and stock market indices as underlying assets.…”

Section: Introductionmentioning

confidence: 99%

Can utility optimization explain the demand for structured investment products?

Hens

Rieger

2013

Quantitative Finance

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In this paper, we first show that for classical rational investors with correct beliefs and constant absolute or constant relative risk aversion, the utility gains from structured products over and above a portfolio consisting of the risk-free asset and the market portfolio are typically much smaller than their fees. This result holds irrespectively of whether the investors can continuously trade the risk-free asset and the market portfolio at no costs or whether they can just buy the assets and hold them to maturity of the structured product. However, when considering behavioural utility functions, such as prospect theory, or investors with incorrect beliefs (arising from probability weighting or probability misestimation), the utility gain can be sizable. Can utility optimization explain the demand for structured investment products?Thorsten Hens * Marc Oliver Rieger † July 2, 2013Abstract In this paper, we first show that for classical rational investors with correct beliefs and constant absolute or constant relative risk aversion, the utility gains from structured products over and above a portfolio consisting of the risk-free asset and the market portfolio are typically much smaller than their fees. This results holds irrespectively of whether the investors can continuously trade the risk-free asset and the market portfolio at no costs or whether they can just buy the assets and hold them to maturity of the structured product. However, when considering behavioral utility functions, such as prospect theory, or investors with incorrect beliefs (arising from probability weighting or probability misestimation), the utility gain can be sizable.JEL classification: G11,D14,C61,D03,D18.

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Reverse convertible bonds analyzed

Cited by 51 publications

References 31 publications

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland

Dual directional structured products

Can utility optimization explain the demand for structured investment products?

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