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Review of Derivatives Research

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18-08-2017

The volatility target effect in structured investment products with capital protection

Authors: Sergio Albeverio, Victoria Steblovskaya, Kai Wallbaum

Published in: Review of Derivatives Research | Issue 2/2018

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Abstract

Designing a structured investment product with capital protection which would be characterized by high capital protection level as well as high equity participation rate is a challenging task in the current market environment. Low interest rates and high volatility levels negatively affect the above key parameters of such investment products. One way to increase the participation rate of a structured investment product with a fixed capital protection level is to use a volatility target (VolTarget) strategy as an underlying asset for a financial option embedded in such a product. We introduce an extended VolTarget mechanism with interest rate dependent volatility target levels and provide a detailed comparative numerical study of European options linked to VolTarget strategies within a hybrid Heston–Vasičec model with stochastic volatility and stochastic interest rate.

previous article Optimal discrete hedging of American options using an integrated approach to options with complex embedded decisions

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The use of exotic options also allows to design the payoff of the structured product in line with the market outlook of the sophisticated investor.

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Title: The volatility target effect in structured investment products with capital protection
Authors: Sergio Albeverio
Victoria Steblovskaya
Kai Wallbaum
Publication date: 18-08-2017
Publisher: Springer US
Published in: Review of Derivatives Research / Issue 2/2018
Print ISSN: 1380-6645
Electronic ISSN: 1573-7144
DOI: https://doi.org/10.1007/s11147-017-9138-2