34 Pages Posted: 7 Mar 2008 Last revised: 29 Jan 2012
Date Written: January 6, 2009
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.
Keywords: Household finance, structured products, retail investor, locally-capped contracts
JEL Classification: G1, G13, G14, G22
Suggested Citation: 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: https://ssrn.com/abstract=1101796