PRICING OF TRAFFIC LIGHT OPTIONS AND OTHER HYBRID PRODUCTS

Thomas Kokholm ()
Additional contact information
Thomas Kokholm: Finance Research Group, Department of Business Studies, Aarhus School of Business, Aarhus University, Fuglesangs Allé 4, Aarhus V, 8210, Denmark

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 05, 687-707

Abstract: This paper considers derivatives with payoffs that depend on a stock index and underlying LIBOR rates. A traffic light option pricing formula is derived under lognormality assumptions on the underlying processes. The traffic light option is aimed at the Danish life and pension sector to help companies stay solvent in the traffic 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 payoffs 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: Traffic light option; LIBOR market model; correlation; simulation; hybrid products (search for similar items in EconPapers)
Date: 2009
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024909005415
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:wsi:ijtafx:v:12:y:2009:i:05:n:s0219024909005415

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024909005415

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().