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

Posted: 20 Feb 2008 Last revised: 21 May 2019

See all articles by Martin Wallmeier

Martin Wallmeier

University of Fribourg - Faculty of Economics and Social Science

Martin Diethelm

University of Fribourg (Switzerland) - Chair of Finance

Date Written: April 2008

Abstract

The market for structured financial products in Switzerland is considered the largest in the world. Its most successful products are multi-asset reverse convertibles with knock-in barriers. We analyze whether these complex instruments are fairly priced. Using a numerical, tree-based valuation method, we obtain an average overpricing of at least 3.4% for 468 certificates outstanding in April 2007. This premium on the entire product corresponds to a price discount of 29% on its 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.

Keywords: Structured products, reverse convertibles, multi-asset options, barrier options, fair pricing, financial engineering

JEL Classification: G13, G15, G14

Suggested Citation

Wallmeier, Martin and Diethelm, Martin, Market Pricing of Exotic Structured Products: The Case of Multi-Asset Barrier Reverse Convertibles in Switzerland (April 2008). https://doi.org/10.3905/JOD.2009.17.2.059, Available at SSRN: https://ssrn.com/abstract=1095772 or http://dx.doi.org/10.2139/ssrn.1095772

Martin Wallmeier (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland
+41 26 300 8294 (Phone)

Martin Diethelm

University of Fribourg (Switzerland) - Chair of Finance ( email )

Bd de Pérolles 90
CH-1700 Fribourg
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
6,633
PlumX Metrics