how to decompose this structured product to pricing and hedging?

clement14 · October 9th, 2003, 1:23 pm

this is a principal-guarantee product.terms:1)5 years2)issue price=$1003)the lowest principal-guarantee rate=104.75%4)linked target is 180-day commercial paper rate(CP180 rate)5)reference rate of linked target is 1%6)paymentsthe 1st year¡G4.75%p.a.the 2nd year¡GMax(5%-2*CP180,0) p.a.the 3rd year¡GMax(5%-2*CP180,0) p.a.the 4th year¡GMax(5%-2*CP180,0) p.a.the 5th year¡GMax(5%-2*CP180,0) p.a.7)style of payments is semiannualhow could I decompose this structured product to pricing and hedging?

clement14 · October 9th, 2003, 1:29 pm

clement14 · October 10th, 2003, 1:48 pm

could anyone give me some hints? thanks for your kindness!does it use capped options to decompose?

derivababy · October 31st, 2003, 10:31 am

Hi Clement14,To start with perhaps you should try to learn how an inverse floater is structured.A good book for that is "Structured products and....." by Das (Wiley edit.).Hope this helps

BeautifulMind · October 31st, 2003, 11:06 am

Just a quote, one of my favourite posts... 2nd message...