Locally-Capped Investment Products and the Retail Investor

34 Pages Posted: 7 Mar 2008 Last revised: 29 Jan 2012

Carole Bernard

Grenoble Ecole de Management

Phelim P. Boyle

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

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

Date Written: January 6, 2009

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.

Keywords: Household finance, structured products, retail investor, locally-capped contracts

JEL Classification: G1, G13, G14, G22

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

Carole Bernard (Contact Author)

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

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

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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