Pricing And Hedging Strategy Of Snowball Structure Income Certificate

Structured products tailored to different risk-return needs are prevailing under the background that the OTC market is becoming more and more mature and securities are seeking a wealth management transformation,among which the existing scale of Snowball products has exceeded 150 billion.These products not only provide good products for investors,but also provide powerful tools for securities to financing.Snowball products are divided into four categories: traditional snowballs,stepped snowballs,non-chasing snowballs,and small snowballs.This paper analyzed the pricing of different kinds of snowball products and compared their results.In the empirical analysis section,according to snowball products’ five return scenarios,this paper used Monte Carlo simulation based on the B-S model and Merton jump-diffusion model to price real snowball products issued on the market and compared the results of different volatility models and the results of different structures of snowball products.This paper then researched the impact of volatility,risk-free interest rate,annualized rate of return,barrier levels,and frequency of knock-out observation periods on product pricing.Finally,this paper researched the strategy of securities that trade underlying assets or futures to transfer risks and obtain profits.According to the pricing results,the following conclusions are drawn: First,except for Galaxy Jinding Snowball,which is issued at a premium,the rest of the structured products are issued at a discount,but the discount rate is not high.second,when the knock-out level was equal to the initial price,the snowball product was less valuable,had a higher probability of holding to maturity,and obtained higher returns in the case of high volatility.Third,the average duration of products was about 100 days,so the issuer should have good liquidity to deal with the early expiration and investors should be prepared for the demand for reinvestment bought by early termination.Fourth,the yield of stepped snowball and small snowball products was lower than those of traditional structures,and the value of snowball products linked to the Hang Seng Technology Index was higher than those linked to the CSI 500 Index with the same parameters.Fifth,trading underlying assets can help securities cover part of their financing costs,and trading futures can cover all the interests that they need to pay.At the end of this paper,Snowball products’ policy risk,market risk,liquidity risk,innovation risk and credit risk were analyzed.This paper gave several suggestions as below: For investors,they need to enhance their knowledge to handle products with complex income structures.For issuers,they need to improve their pricing ability,including selecting good targets,so as to successfully achieve their transformation.For regulators,they should strengthen their supervision of snowball products and promote stable development of the market.