Locally-Capped Investment Products and the Retail Investor
Grenoble Ecole de Management
Phelim P. Boyle
Wilfrid Laurier University - School of Business & Economics; University of Waterloo
Stanford Graduate School of Business
January 6, 2009
Journal of Derivatives, Vol. 18, No. 4, pp. 72-88
Locally-capped products are an economically important and poorly understood category of structured financial products. These contracts combine a guaranteed payoff with a bonus equal to some accumulation of the capped periodic returns of a reference portfolio. We show that these products often contain unreasonably optimistic hypothetical scenarios in their prospectuses, and conjecture that these unrealistic hypothetical scenarios may contribute to the popularity of these products. We use the Black and Scholes model to show that locally-capped products perform poorly in turbulent markets and that currently available products were overpriced by an average of 6.5% when they were sold to the public.
Number of Pages in PDF File: 34
Keywords: Household finance, structured products, retail investor, locally-capped contracts
JEL Classification: G1, G13, G14, G22
Date posted: March 7, 2008 ; Last revised: January 29, 2012
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