Optimal design of equity-linked products with a probabilistic constraint

Phelim Boyle and Weidong Tian

Scandinavian Actuarial Journal, 2009, vol. 2009, issue 4, 253-280

Abstract: There is a rich variety of tailored investment products available to the retail investor. These products combine upside participation in bull markets with downside protection in bear markets. Examples include the equity-linked products sold by insurance companies and the structured products marketed by banks. This paper examines a particular contract design for products of this nature. The paper finds the optimal design from the investor's viewpoint. It is assumed that the investor wishes to maximize expected utility of the terminal wealth subject to certain constraints. These constraints include a guaranteed rate of return as well as the opportunity to outperform a benchmark portfolio with a given probability. We derive the explicit form of the optimal design assuming both constraints apply and we illustrate the nature of the solution using some specific examples.

Date: 2009
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/03461230802281070 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2009:y:2009:i:4:p:253-280

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461230802281070

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().