Abstract

http://ssrn.com/abstract=1101796
 
 

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Locally-Capped Investment Products and the Retail Investor


Carole Bernard


University of Waterloo

Phelim P. Boyle


Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Will Gornall


Stanford Graduate School of Business

January 6, 2009

Journal of Derivatives, Vol. 18, No. 4, pp. 72-88

Abstract:     
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

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Date posted: March 7, 2008 ; Last revised: January 29, 2012

Suggested Citation

Bernard, Carole and Boyle, Phelim P. and Gornall, Will, Locally-Capped Investment Products and the Retail Investor (January 6, 2009). Journal of Derivatives, Vol. 18, No. 4, pp. 72-88. Available at SSRN: http://ssrn.com/abstract=1101796

Contact Information

Carole Bernard (Contact Author)
University of Waterloo ( email )
waterloo, Ontario N2L 3G1
Canada
Phelim P. Boyle
Wilfrid Laurier University - School of Business & Economics ( email )
Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)
University of Waterloo
Waterloo, Ontario N2L 3G1
Canada
Will Gornall
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
HOME PAGE: http://stanford.edu/~gornall/
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