Home
Conference Venue
Call for Papers
Paper Submission & Registration
Program Committee
Meeting Agenda / Academic Program
Workshop for Ph.D.Students
Sponsors
Contact
DGF
Conference of 2007
Finance Center Münster
Practitioners' Event
Venue of the Practitioners' Evening Event
About Münster
Accomodation
Restaurants
Relax certificates are written on several underlying stocks. Their payoffs are initially equal to those of a coupon bond with a quite attractive coupon rate, which are, however, canceled and replaced by the worst-performing stock in case any of the underlying stocks loses a usually rather high fraction of its initial value. We analyze the pricing and risk management of these contracts, which can be decomposed into a knock-out bond component and a knock-in minimum option. First, we show that the prices of relax certificates are decreasing in the number of underlying stocks and in the volatilities of these stocks, while they increase in the correlation between the stocks. The price discount due to the knock-out feature is significant. Thus, even if the losses in any of the underlyings have to be very high for the investor to receive the worst-performing stock instead of a repayment of the notional, this risk cannot be neglected. Second, we derive upper price bounds for relax certificates. These upper price bounds also give superhedging strategies the issuer of relax certificates can use to hedge his position without being exposed to the risk of the delta-hedging strategy becoming unstable when the lower barrier is approached.
Abstract
Pricing and Risk Management of Relax Certificates
Branger, Nicole; Mahayni, Antje; Schneider, Judith ChristianeRelax certificates are written on several underlying stocks. Their payoffs are initially equal to those of a coupon bond with a quite attractive coupon rate, which are, however, canceled and replaced by the worst-performing stock in case any of the underlying stocks loses a usually rather high fraction of its initial value. We analyze the pricing and risk management of these contracts, which can be decomposed into a knock-out bond component and a knock-in minimum option. First, we show that the prices of relax certificates are decreasing in the number of underlying stocks and in the volatilities of these stocks, while they increase in the correlation between the stocks. The price discount due to the knock-out feature is significant. Thus, even if the losses in any of the underlyings have to be very high for the investor to receive the worst-performing stock instead of a repayment of the notional, this risk cannot be neglected. Second, we derive upper price bounds for relax certificates. These upper price bounds also give superhedging strategies the issuer of relax certificates can use to hedge his position without being exposed to the risk of the delta-hedging strategy becoming unstable when the lower barrier is approached.