PRICING CERTIFICATES UNDER ISSUER RISK

Barbara Götz, Rudi Zagst and Marcos Escobar Anel ()
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Barbara Götz: HVB-Stiftungsinstitut für Finanzmathematik, Technische Universität München Boltzmannstrasse 3, 85748 Garching, Germany
Rudi Zagst: HVB-Stiftungsinstitut für Finanzmathematik, Technische Universität München Boltzmannstrasse 3, 85748 Garching, Germany

Chapter 6 in Alternative Investments and Strategies, 2010, pp 123-146 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractCertificates have become very popular in Germany, Austria, and Switzerland in the last few years. From a technical and legal point of view they are bonds. Thus, their value actually also depends on the rating and creditworthiness of the issuing company. This aspect is in general neglected in the pricing of these products. In the following, we present a model which overcomes this lack and incorporates the default risk of the issuing company in the pricing.We derive closed-form expressions for index, basket, and bonus certificates under issuer risk in a Black–Scholes model framework. The results are analyzed for different scenarios and compared with valuations in a model which neglects issuer risk.

Keywords: Alternative Investments; Portfolio Selection; Trading Strategy; Product Innovations; CPPI; Portfolio Optimization; Portfolio Insurance (search for similar items in EconPapers)
Date: 2010
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