| Summary: | 碩士 === 國立臺北大學 === 國際財務金融碩士在職專班 === 96 === In recent years, since domestic economy is undergoing structural transition, the market rates of interest remain low for a sustained period. Under these circumstances, financial institutions have been actively developing structured products combining fixed-income securities with various options. However, investors could face numerous traps when buying these products. This research focuses on a product of a life insurance company in Taiwan to see whether its price is reasonable. The motivation under this research is, thus, intended to help investors understand more about the characteristics and structure of these kinds of investment-linked product.
This research uses Monte Carlo simulation to evaluate the structure note in our case study and finds that it is priced with a premium of around 3.4% of its face amount. The premium could be deemed as the fair return to the issuer for paying the hedge costs and assuming uncertainties such as those associated with expected hedging error. We add additional 3 kinds of indexation design to simulate their returns. Of these three additional designs, the point-to-point contract can achieve a return as high as 70%. All four indexation designs are able to achieve the minimum guaranteed foreign currency return of 40% with a probability of more than 99%. By using the historical data of Nikkei and Hang Seng Index to conduct back testing, we found that the annual ratchet contract has the opportunity to achieve a return of 60%, and the return distribution is about the same as that of the Monte Carlo simulation, which indicates that the historical return variation can be explained by the simulated results. With respect to the sensitivity analysis, the variation in the embedded option value does not have a significant effect on the value of the contract as a whole, since it only accounts for a small fraction of the contract value. Besides, variations of the guaranteed foreign currency returns and the participation rate have a positive relationship with the initial theoretical value of the contract, while the relationship between the discount rate and the initial theoretical value are negative.
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