Structured Products

Question 1

Equity protection IC

Answer 1

bond that pays off positive performance of underlying in the end. replicate by: long zero coupon bond, long ATM call. Problem: if we spend 98EUR on bond for the 100EUR ZC payment in the end (2.x% yield), we only have 2EUR for call -> might not be enough to get the 100%upside eprformance. solve by equity protection caps

Question 2

Equity protection caps (Collar ICs)

Answer 2

Only get upside up until a certain point (long ZCB, long ATM call, finance this call with selling OTM call)

Question 3

Equity protection greeks

Answer 3

Delta: positive
Vega: positive (as long ATM short OTM)
Rho: negative (more discounting if rates increase)
dividend yield: negative (buy stock but dont get dividend)
time: depends

Question 4

Equity protection short

Answer 4

long ZCB, long ATM put -> delta -
rho -
dividend yield +
time depends

Question 5

Asian options payoff

Answer 5

NA x Max{S_Avg / K -1, 0}. ALWAYS cheaper than European option

Question 6

Standard reverse convertible

Answer 6

get unconditional coupon at maturity

if price of underlying has declined -> receive shares (number of shares equals notional divided by strike)

Question 7

Standard reverse convertible replication

Answer 7

Long ZCB, Short ATM put

Question 8

Reverse convertible greeks

Answer 8

Delta +
Vega -
Rates -
dividend -
time + (but depends)

Question 9

Bonus cap

Answer 9

long ZCB, short down&in put with strike at bonus and barrier at barrier

Question 10

Bonus cap: barrier and bonus intuition

Answer 10

Lower barrier -> lower risk of touching -> lower bonus

lower vola -> lower risk of touching -> lower bonus

Question 11

Autocallable (express)

Answer 11

early redemption possible if above trigger (usually strike).
Payoff times coupon if above trigger
only notional if below trigger and above barrier
negative performance if below barrier

Question 12

Express replicated

Answer 12

long call at K=0
long DAO barrier put
short call with strike=express strike
long series of digital KO calls with strike=express strike

Question 13

Express greeks

Answer 13

delta + (not monotonic)
vega - (but depends)
dividends -

Question 14

Outperformance IC

Answer 14

positive returns magnified, no capital protection. replicate by adding ATM calls in quantity outperformance rate/100 OR e.g. ZCB + short ATM put + long ATM call, but 1.5 times more calls if you want 150% participation

Question 15

Turbo

Answer 15

replicated by long underlying + sale of ZCB with notional=strike. Risky, more leverage when negative performance. Fixed Leverage -> compounding effect, can lose when high volatility

Question 16

Shorts

Answer 16

bearish pendant of turbos