Equity Derivative Structuring Case Study

Topics: Asset, Parametric equation, Contract Pages: 20 (4679 words) Published: November 22, 2010
LexiFi

OVERVIEW ......................................................................................................................................................... 1 PRODUCT DEFINITION ................................................................................................................................... 1 SAMPLE PRODUCT............................................................................................................................................... 1 MLFI DEFINITION ............................................................................................................................................... 2 SIMULATION ...................................................................................................................................................... 5 SIMULATION OF CONTRACT’S EXECUTION (PERFORMANCE ANALYSIS) ............................................................. 5 SIMULATION OF FUTURE PRICE ........................................................................................................................... 7 SIMULATION AUDIT ............................................................................................................................................ 8 PRICING............................................................................................................................................................... 8 PRICE, GREEKS, PAYOFF DISTRIBUTION ............................................................................................................. 8 SENSITIVITY ANALYSIS ....................................................................................................................................... 9 EVENT PLANNING .......................................................................................................................................... 11 EVENT DETECTION............................................................................................................................................ 11 CONTRACT EXPLORER ...................................................................................................................................... 12 FROM PROTOTYPING TO PRODUCTION ................................................................................................ 12 PRODUCT DESIGN, USER INTERFACE, AND PERSISTENCE .................................................................................. 12 RAPID PROTOTYPING AND STAGED DEPLOYMENT OF NEW VALUATION ALGORITHMS .................................... 13 REPORTING ....................................................................................................................................................... 13 CONCLUSION ................................................................................................................................................... 14

Overview
This document illustrates the process of structuring a new financial product with LexiFi. The case study is based on a multi-period, multi-underlying equity derivative, representative of the products marketed in European retail markets. Topics covered include: • Product definition • Simulation • Pricing • Event planning • Transition from prototyping to production

Product Definition Sample Product
The sample contract is based on a basket of twenty assets and pays 85% of the basket’s initial value plus the highest positive average return calculated on ten annual observation dates. Each year, the basket’s value is calculated using the following rules: • As soon as an asset becomes the best performer on a given year, that year’s performance, subject to a performance boost applicable in each of the first seven annual observation dates (see below), is used in the calculation of the average basket’s performance not only for the given year but also

Page 2 for the following years. The contribution of a once best performing asset to the...