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Leverage Certificates - A Case of Innovative Financial Engineering

Rodrigo Hernandez (), Yingying Shao () and Pu Liu ()
Additional contact information
Rodrigo Hernandez: Radford University, 274 Kyle Hall, Radford, VA 24142, U.S.A.
Yingying Shao: Towson University, 316F Stephens Hall, Towson, MD 21252, U.S.A.
Pu Liu: Harold A. Dulan Chair Professor in Capital Formation; Robert E. Kennedy Chair Professor in Investment, University of Arkansas, 302B Business Building, Fayetteville, AR 72701, U.S.A.

Review of Economics & Finance, 2017, vol. 9, 71-82

Abstract: This paper introduces a new financial product named Leverage Certificates and provides detailed descriptions of the product specifications. We show that the payoff of a Leverage Certificate can be duplicated with a portfolio of securities (i.e. bonds, plain vanilla options and exotic options). A pricing formula is developed to price the certificates. A certificate issued by Credit Suisse First Boston is presented as an example to examine how well the model fits empirical data. The results show that issuing Leverage Certificates is a profitable business and the results are in line with previous studies pricing other structured products.

Keywords: Leverage Certificates; Outperformance Certificates; Reverse Exchangeable Bonds; Option pricing; Structured products; Financial innovation (search for similar items in EconPapers)
JEL-codes: G12 G13 G23 G24 (search for similar items in EconPapers)
Date: 2017
Note: Authors are thankful for the suggestions from the participants at the 20th PBFEAM Conference, the 2012 FMA Annual Meeting, the 2012 SFA Annual Conference, the 2013 Universidad Aut¨®noma de Yucatan Research Conference, and the 2017 AEF Annual Meeting. Funding for the research was provided by Harold A. Dulan Professorship for Capital Formation and Robert E. Kennedy Chair for Investment.
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