The volatility target effect in structured investment products with capital protection

Sergio Albeverio (), Victoria Steblovskaya () and Kai Wallbaum ()
Additional contact information
Sergio Albeverio: Universitaet Bonn
Victoria Steblovskaya: Bentley University
Kai Wallbaum: Allianz Global Investors GmbH

Review of Derivatives Research, 2018, vol. 21, issue 2, No 3, 229 pages

Abstract: Abstract Designing a structured investment product with capital protection which would be characterized by high capital protection level as well as high equity participation rate is a challenging task in the current market environment. Low interest rates and high volatility levels negatively affect the above key parameters of such investment products. One way to increase the participation rate of a structured investment product with a fixed capital protection level is to use a volatility target (VolTarget) strategy as an underlying asset for a financial option embedded in such a product. We introduce an extended VolTarget mechanism with interest rate dependent volatility target levels and provide a detailed comparative numerical study of European options linked to VolTarget strategies within a hybrid Heston–Vasičec model with stochastic volatility and stochastic interest rate.

Keywords: Volatility target strategy; Structured investment products with capital protection; Participation rate; Pricing of embedded option (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11147-017-9138-2

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