Time‐invariant portfolio strategies in structured products with guaranteed minimum equity exposure

Abstract

We introduce a new exotic option to be used within structured products to address a key disadvantage of standard time‐invariant portfolio protection: the well‐known cash‐lock risk. Our approach suggests enriching the framework by including a threshold in the allocation mechanism so that a guaranteed minimum equity exposure (GMEE) is ensured at any point in time. To be able to offer such a solution still with hard capital protection, we apply an option‐based structure with a dynamic allocation logic as underlying. We provide an in‐depth analysis of the prices of such new exotic options, assuming a Heston–Vasicek‐type financial market model, and compare our results with other options used within structured products. Our approach represents an interesting alternative for investors aiming at downsizing protection via time‐invariant portfolio protection strategies, meanwhile being also afraid to experience a cash‐lock event triggered by market turmoils.