Research On Pricing Model And Strategies Of OTC Derivatives Based On Snowball Products

With the maturity of market and the professional ability of securities companies,more and more OTC derivatives are attracting investors' attention.On the one hand,various derivatives bring potential investment opportunities,and enrich investors' portfolio.On the other hand,they put forward higher requirements for investors' risk control.At present,few articles take typical case as a starting point to help investors understand the market in depth.This paper takes snowball products issued by a securities firm as an example,and studies its pricing methods and investment strategies through real data,which help investors deeply understand its characteristics,and provides practical reference for trading OTC products.The paper is also useful for regulators and other securities companies.This paper studies the snowball products linked to the CSI 500 index from 2017 to 2019,and calculates the intrinsic value by Monte Carlo simulation.Through the empirical study of real data,this paper compares the performance of B-S model and variance gamma model on snowball products.The empirical results show that the accuracy of B-S model is worse than that of variance gamma model even if different volatility estimation methods are considered.The latter has the best fitting result on the products and the investment strategy based on it can obviously generate excess return.The results show that the real value of snowball is influenced by the distribution and the jump of stock price,which cannot be ignored in the process of investment and risk control.After determining the appropriate pricing model,this paper further explains the investment strategies of snowball products for investors.In addition to the model-based investment arbitrage strategy,snowball is suitable for moderate bullish investors.Theoretically,snowball products are equivalent to put options with barriers,so it has the advantages of enhanced returns.They also have better investment performance in the case of low volatility,positive skewness and high kurtosis of the distribution.Snowball products are also of great significance to promote the development of the over-the-counter market and the transformation of the securities companies.Securities companies need to increase the professional ability of derivatives,combine market conditions and investor preferences to better regulate and develop derivatives market.The result of variance gamma model also implies that securities companies and regulators should pay more attention to the distribution and jump movement of underlying,especially tail risk.Ignoring this kind of situation will likely lead to significant deviation in valuing and hedging results.