The market for structured financial products in Switzerland ranks among the largest in the world. A unique characteristic of the Swiss market is that its most successful products are reverse convertibles on multiple assets with conditional capital protection (multiple barrier reverse convertibles, MBRC). In other countries, an active market only exists for simpler types of reverse convertibles. The valuation of MBRCs is not straightforward, and pricing tools are not yet publicly available. Thus, transparency with respect to fair values might be poor, and it is not obvious that the competition between issuers is strong enough to ensure "fair" pricing. We provide the first empirical study on market pricing of MBRCs based on a comprehensive database of 468 certificates outstanding in April 2007. Using a numerical, tree-based valuation method, we obtain an average overpricing of at least 3.4%. This premium on the entire product corresponds to a price discount of 29% on the 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.

The market for structured financial products in Switzerland ranks among the largest in the world. A unique characteristic of the Swiss market is that its most successful products are reverse convertibles on multiple assets with conditional capital protection (multiple barrier reverse convertibles, MBRC). In other countries, an active market only exists for simpler types of reverse convertibles. The valuation of MBRCs is not straightforward, and pricing tools are not yet publicly available. Thus, transparency with respect to fair values might be poor, and it is not obvious that the competition between issuers is strong enough to ensure "fair" pricing. We provide the first empirical study on market pricing of MBRCs based on a comprehensive database of 468 certificates outstanding in April 2007. Using a numerical, tree-based valuation method, we obtain an average overpricing of at least 3.4%. This premium on the entire product corresponds to a price discount of 29% on the 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.

Although several types of options on multiple assets are popular in today's financial markets, valuing multi-asset options is still a challenge in finance. The standard framework of multivariate normality is often inappropriate, since it ignores fat tails and other stylized facts of asset returns. The Variance Gamma (VG) model appears to be a promising alternative. In the univariate case, it has become a standard tool in finance. The traditional way to extend the model to the multivariate case is to subordinate a Brownian motion through a univariate subordinator. In recent years, generalizations with multivariate subordinators have been proposed. Our objective is to study two versions of the multivariate VG model in a large-scale application with multi-asset options traded in an active market. Our database consists of 468 multivariate barrier reverse convertibles at the Swiss market for structured products. The Swiss market ranks among the largest in the world and is characterized by an exceptional popularity of multiple asset options. We find that there is a trade-off between the two VG models considered: one performs better in capturing the smile, the other is more often able to capture the correlation structure. In all, based on our calibration, only 316 out of 468 products can be evaluated with at least one of the two VG models. We conclude that there is a need for more flexible extensions.JEL classification: G13; G15; G14

Although several types of options on multiple assets are popular in today's financial markets, valuing multiasset options is still a challenge in finance. The standard framework of multivariate normality is often inappropriate, since it ignores fat tails and other stylized facts of asset returns. The variance gamma (VG) model appears to be a promising alternative. In the univariate case, it has become a standard tool in finance. The traditional way to extend the model to the multivariate case is to subordinate a Brownian motion through a univariate subordinator. In recent years, generalizations with multivariate subordinators have been proposed. Our objective is to study two versions of the multivariate VG model in a large‐scale application with multiasset options traded in an active market. Our database consists of 468 multivariate barrier reverse convertibles at the Swiss market for structured products. The Swiss market ranks among the largest in the world and is characterized by an exceptional popularity of multiple asset options. We find that there is a trade‐off between the two VG models considered: one performs better in capturing the smile, the other is more often able to capture the correlation structure. In all, based on our calibration, only 316 of 468 products can be evaluated with at least one of the two VG models. We conclude that there is a need for more flexible extensions. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark