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Conferences

SESSION V-2 : DERIVATIVES (21/12/2007 à 09h00)

Jerôme Detemple (Boston University School of Management)

Optimal Design of Structured Products and the Role of Capital Protection

Auteurs : BERNARD Carole and TIAN Weidong (University of Waterloo), BOYLE Phelim (Wilfrid Laurier University) Email :c3bernar@uwaterloo.ca

Intervenants : BERNARD Carole (University of Waterloo)

Rapporteurs : WU Lue (Goethe University)

Index linked products (ILP) and other structured products as a new asset class are
currently becoming very popular. In this paper we develop a simple model to address
the optimal design issue from the seller’s perspective of a class of structured products.
The model derives some common features of these ILPs in particular the need for
capital protection, (even though issuers might have different preferences of risk), in an
incomplete market setting. On the other hand, the optimal design of ILPs can depend on
the issuer’s preference of risk and thus provides some explanations to the heterogeneity
of the index-linked products currently traded on the financial market. Through an empirical
analysis of the structured products currently traded on the American stock exchange,
we find out that this theoretical optimal design model partly supports current designs of
index linked products.

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American Index Put Options Early Exercise Premium Estimation

Auteurs : DOFFOU Ako (Sacred Heart University) Email : adoff21@yahoo.com

Intervenants : DOFFOU Ako (Sacred Heart University)

This paper examines empirically the value of early exercise by testing the ability of two
American put valuation models to predict the early exercise premium for the S&P 100
American put options. An accuracy test and a quality test are performed on (1) the
MacMillan (1986) & Barone-Adesi and Whaley (1987) model, and (2) the Carr, Jarrow
and Myneni(1992) model. The test results show that early exercise premium is significant
regardless of moneyness. Moreover, consistent with the theory, the value of early exercise
is significantly negatively related to moneyness and interest rates and significantly positively
related to time to maturity and to the volatility of the underlying index. Both American put
valuation models examined do not fully capture the value of early exercise embedded in
American put prices.

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Get an implied correlation to price equity-interest rates hybrids

Auteurs : HAMEL Mathieu (Inria) Email : mathieu.c.hamel@gmail.com

Intervenants : HAMEL Mathieu (Inria)

Rapporteurs : Aboura Sofiane (Université de Paris-Dauphine)

To price vanilla options, the market does not rely on empirical parameters. Why should
it be the case when pricing hybrids? When pricing long dated equity or indexes linked
derivatives, one cannot assume the interest rates to be constant. As a consequence the
market, consciously or not, does not only make bets on the volatility but also on the
potential drift of the underlying. Therefore long dated vanilla options incorporate information
on the dynamic of the interest rates. Using market prices from variance swaps, caps/floors
and long dated vanilla options, one proposes a simple way to extract implied correlation
between indexes and interest rates through a stochastic interest rates-stochastic volatility model.

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