Pricing of Traffic Light Options and other Correlation Derivatives

Thomas Kokholm ()
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Thomas Kokholm: Department of Business Studies, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://asb.dk/staff/bs/thko.aspx?page=%7B803EFF10-69F7-4C0F-AEE3-F7F410E4B6F2%7D

No F-2008-01, Finance Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper considers derivatives with payo¤s that depend on a stock index and underlying LIBOR rates. A tra¢ c light option pricing formula is derived un- der lognormality assumptions on the underlying processes. The tra¢ c light option is aimed at the Danish life and pension sector to help companies stay solvent in the tra¢ c light stress test system introduced by the Danish Financial Supervisory Authorities in 2001. Similar systems are now being implemented in several other European countries. A pricing approach for general payo¤s is presented and illustrated with simulation via the pricing of a hybrid derivative known as the EUR Sage Note. The approach can be used to price many existing structured products.

Keywords: LIBOR market model; traffic light option; correlation; simulation; derivatives pricing; structured products (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mkt
Date: 2008-02-19
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