Research On The Pricing Of The Exchange Rate Linked Products

Structured products grow rapidly in China in recent years. From 2008 to 2012,the circulation of structured products of Chinese commercial banks grew from 528 to 1680, which showed a good trend its development. Chinese commercial banks issued 730 structured products from January to May in 2013, 285 of them are Exchange Rate-Linked (ERL) products, which holds 40% of the total circulation.This paper researched on ERL product based on its domestic and international development and pricing, analyzed features, benefits, functionality and risks of the product to get the accurate price. Take a Rang Accruals product of China Merchants Bank for example, this paper constructed pricing model to get the pricing of ERL structured products, applied the Black-Scholes Model and the Monte-Carlo Simulation to determine the cash flow of the product, analyzed the impact of fluctuation ratio changes to cash flow changes, applied BGM model to determine the discount rate, and calculate the theoretical price of the product.The result of empirical studies shows that Rang Accruals product is issued at premium. The theoretical price is inverse correlated to the fluctuation ratio of ERL,and the impact is strong when the fluctuation ratio is between 0-0.35. Both Black-Scholes Model and Monte-Carlo Simulation underestimate the product price.The Monte-Carlo Simulation is much closer to the actual price.