Fourier Transformation Pricing Method For Rate-Linked Triggered Structured Bonds

Since the financial crisis in2008, governments have been used a variety of policyinstruments to stimulate the economy, such as lower interest rates, and theimplementation of accommodative monetary policy. However, it has given newchallenge to investors, because people try to preserve and increase the value of assets. Inour country, the financial markets are still primitive and with few investmentopportunities. Investor may have the opportunity to get a higher interest rate if theprincipal is safety or have multi-level of different interest rate structure if the principalis unsafe. But many financial products available in the market are not accurate inpricing which are not conducive investors to make decisions. Thus in this case, theresearch of the pricing of the rate-linked triggered structured products will appearespecially important and meaningful.This paper chooses rated-link triggered structured bonds as the researching objects,which affected by Shibor interest rate. After analyzing triggered boundary conditions,we can determine on each component of the theoretical value of the product. On thechoice of the model, the CIR interest rate model is discussed, and by using maximumlikelihood estimation (MLE) and generalized moment estimation GMM two methods toestimate the overall parameters. Finally using Fourier transformation method to theproduct pricing, we can put forward corresponding countermeasures and Suggestions toinvestors and issuers.First of all, this paper introduces the concept and the characteristics the rate-linkedtriggered structured products, as well as the significance of the study of this kind ofproduct. Because of the complexity of the reference rate, analytical solution or binarytree method, or finite difference method in the past are difficult to overcome thedifficulty of the task, and the precision is not enough. So it is necessary to use Fouriertransform method to trigger type interest rate pricing structured products.Then, this paper combinative the CIR model, and evaluate Shibor rate on the basisof the effort of previous. In the article, we mainly do the following jobs:1. based on theCIR model, we chose two methods of parameter estimation and use the results of GMMfor final calculations. 2. As to the discussion of pricing triggered structured product, we use a specialfunction to merge the piecewise functions. It means the work is equivalent to calculate azero coupon bonds and use Fourier transformation calculation. By solution the two parts,we will get the results. The core of this paper exactly is the pricing process theory andthe formula argumentation.3. We make a case analysis of a financial product of Shibor-linked. With the use ofMATLAB, we calculate the parameters and price, and finally conclude that the parvalue of this kind of financial product is50000, while pricing result is49919.05. Thetrue value is less than the par value, so it is not worth buying. This part is also theempirical application.Comprehensive full text theory part and empirical calculation part, this paper maysafely draw a conclusion that:1. Trigger sex structured rate bonds gradually become thefuture bank financing product development direction;2. CIR model is more commoninterest rate model, it can better describe Shibor interest rate trend, and can show goodaccuracy and stability.3. Using the Fourier transform method can be more reasonablefor this kind of products. In fact, if in the much more complex cases, we could make alittle change to use fast Fourier transform method (FFT), which will bring greaterconvenient calculation.