Research On The Pricing Strategy Of Index-linked Structured Financial Products

With the gradual improvement of the financial market and the accumulation of wealth among residents,the wealth management market has created a wave of investment.Unlike traditional fixed income products,structured financial products are favoured by investors for their flexible return structure and wide variety of product types.The 20 th Party Congress has put forward higher service requirements for financial institutions.Issuing institutions need to actively provide assistance to social wealth management and do a solid job in product design and innovation,striving to enhance investors’ sense of access while escorting the high-quality development of the structured financial products market.Therefore,both investors and issuers need to pay attention to the valuation of structured financial products and grasp their price characteristics to provide a basis for decisions making.In this background,a review of the literature reveals that there are a variety of options pricing methods,but a distinction needs to be made when applying them to structured financial products embedded with different options,where the accuracy of the pricing results is not necessarily proportional to the complexity of the model selection.This paper analyzes the basic structure of structured products based on the technical idea of portfolio decomposition in financial engineering,and obtains the general rules of their return structure,which lays a theoretical foundation for subsequent products to be split and valued.Through realistic analysis,it is observed that individual investors are the main investment force in China’s structured financial product market,and the design style of issuing institutions is mainly to construct medium to long duration,medium to low risk and non-principal-protected product features,so this paper selects representative index-linked individual financial products for pricing analysis.The volatility parameters are estimated using the historical closing price of the CSI 300 as the observed value and combined with the Monte Carlo simulation process to predict the future path of index price movements.The accuracy and reasonableness of the valuation model’s results are judged by the product’s earnings characteristics,and the sensitivity of the product’s price and the risks involved are further analyzed.Based on the study,the following conclusions are reached.Firstly,The time series over the sample period fit the volatility best when subjected to a GARCH(1,1)model with a normal distribution.Secondly,the results of the Monte Carlo simulation process show that the closer the observation date is to the product’s maturity date,the smaller the chance of the product achieving a high return.The good agreement between the simulation results of the pricing model and the actual maturity of the product indicates that the choice of the GARCH model combined with the Monte Carlo simulation method can predict the maturity outcome of the automatically redeemable product.In addition,the index-linked structured financial product is issued at a discount within a reasonable range,which is in line with the non-principal-protected design requirements of the structured financial product.Due to the long duration of the product,the issuer may have reduced the issue price to compensate investors for liquidity.Thirdly,a sensitivity analysis of product prices reveals that changes in hurdle rates,risk-free rates and volatility can all lead to an inverse movement in the total product value.Among them,the hurdle rate has the greatest impact on the total product value.Therefore,it is recommended that issuers enhance their market competitiveness by optimizing the design of embedded options in their products and improving the reasonableness of product pricing,in the hope that investors will improve their ability to analyze returns and risks and establish the right investment philosophy.