Imbedded Options Pricing Of Asset-backed Securities In China

This thesis is focused on the topic of development of asset-backed securities in China, more specifically, corporate asset-backed securities. Comparison has been made between the products’development in Chinese and US markets via several perspectives, thus pointing out current shortcomings and future possible development directions. Several key factors in corporate asset-backed securities, including choice of underlying assets, bankruptcy isolation and credit enhancement, have been discussed through deep analysis of four typical cases in the prior round of asset securitization in China, and the pricing issue is chosen to be put under further deep research due to the urgent need of accurate and scientific pricing method to enhance market efficiency and accelerate development of ABS products. Based on analysis of characters of underlying assets in past practices, the paper points out existing problems in pricing system and puts forward several factors to be considered in ABS products pricing. Three pricing models have been deduced according to different cash flow characteristics related with different underlying assets, and empirical tests have been carried out for further discussions. The research finds out some unsophisticated aspects in prior practices through a different perspective, as well as provides with insights and frames for future ABS product pricing practices.Based on analysis of the characteristics of underlying assets in China’s past practice, assets that affect pricing are classified as three types. Ordinary future receivables with relatively certain timing and amount of future cash flow, can be priced with simplified cash flow discount method; assets related with infrastructures should be considered about real option value when pricing due to its related flexibility in management decisions; assets related to receivable loans, such as future financial lease income, should be taken account into the effect of prepayment in pricing. The article further looks into the above three types, and puts forward fuzzy-number based real option pricing and Monte-Carlo simulation based prepayment pricing. Data in GuanShen Highway ABS and YuanDong Renting ABS has been applied respectively to test the model and find defects in those practices. As to the former one, theoretical price should be between800and806million, but the real price was only580million, mainly due to some special terms in management plan. Thus we can conclude that this practice failed to fully realize risk isolation. As to the latter one, based on1000Monte-Carlo simulation, the theoretical price is quite similar to real price, though0.86 million less, as the plan didn’t consider prepayment risk in evaluating, but only take some rough estimation based on the company’s historical data. Besides, the frame of pricing based on embedded American option has been presented, so as to provide further research with useful thoughts.