The Valuation of Structured Products: Empirical Findings for the Swiss Market

Abstract

This article analyses the valuation of 192 structured products without a capital guarantee. In contrast to similar studies, this investigation takes in both the primary and the secondary market. Its central element is a comparison of the implied volatilities of the options contained in the structured products with those of comparable EUREX options. Generally speaking, the results may well come as a surprise both concerning the scale of the phenomenon detected and its significance. Taken as a whole, the results provide grounds for assuming that certain inefficiencies exist on the Swiss market for structured products and that lead managers manage to exploit their quasi-monopolistic position in a rational manner. Copyright Swiss Society for Financial Market Research 2005structured products, implied volatility, valuation,

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

“…Three studies on the pricing differences between products find a positive relationship between complexity and overpricing: Grünbichler and Wohlwend (2005) for Switzerland, Stoimenov and Wilkens (2005) for Germany and Hernandez et al (2007) for an international sample. Stoimenov and Wilkens (2005) and Hernandez et al (2007) report average premiums of 4.77% and 5.40% for barrier products, for instance, while simpler products trade at a premium of about 3%.…”

“…Reverse convertibles, however, might be chosen by investors with bounded rationality, who put too much weight on the sure coupon payment (see the concept of mental accounting by Thaler (1985)). Grünbichler and Wohlwend (2005) express this view (p. 373): " Given the fact that capital-market interest rates were very low, it can be assumed that a number of investors allowed themselves to be enticed by the visually attractive coupon payments of structured products with coupons, but failed to make the correct appraisal of the risks inherent in such products." (see also Szymanowska et al (2007)).…”

Credit risk and bank margins in structured financial products: Evidence from the German secondary market for discount certificates

“…In contrast to this, they also value the embedded option as default-free. A similar approach is used by Grünbichler and Wohlwend (2005) for the Swiss market. Stoimenov and Wilkens (2005) analyze the pricing of various types of SFPs in Germany and incorporate the issuers' default risk by applying the model of Hull and White (1995) with an issuer-averaging and time-independent spread, assuming the independence of market risk from credit risk.…”

Market makers’ optimal price-setting policy for exchange-traded certificates

“…In fact, theoretical models imply that investors' demand for certificates can hardly be justified by standard preferences (Breuer and Perst, 2007;Branger and Breuer, 2008;Bernard 1 Other studies reporting overpricing include for the US Chen and Kensinger (1990); Chen and Sears (1990); Baubonis et al (1993); Benet et al (2006), for Germany Stoimenov and Wilkens (2005); Muck (2006); Wilkens and Stoimenov (2007); Baule et al (2008); Baule (2011); Baule and Tallau (2011), for Switzerland Wasserfallen and Schenk (1996); Burth et al (2001); Grünbichler and Wohlwend (2005); Wallmeier and Diethelm (2009), and for the Netherlands Szymanowska et al (2009).…”