Designing minimum guaranteed return funds

In recent years there has been a significant growth of investment products aimed at attracting investors who are worried about the downside potential of the financial markets. This paper introduces a dynamic stochastic optimization model for the design of such products. The pricing of minimum guaran...

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Bibliographic Details
Published in:Quantitative finance 2007-04, Vol.7 (2), p.245-256
Main Authors: Dempster, M. A. H., Germano, M., Medova, E. A., Rietbergen, M. I., Sandrini, F., Scrowston, M.
Format: Article
Language:English
Subjects:
Asset & liability management
Bond portfolios
CAPM
Dynamic programming
Dynamic stochastic programming
Economic factor model
Guaranteed returns
Guaranty funds
Investment products
Stochastic models
Studies
Yield curve
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Summary:In recent years there has been a significant growth of investment products aimed at attracting investors who are worried about the downside potential of the financial markets. This paper introduces a dynamic stochastic optimization model for the design of such products. The pricing of minimum guarantees as well as the valuation of a portfolio of bonds based on a three-factor term structure model are described in detail. This allows us to accurately price individual bonds, including the zero-coupon bonds used to provide risk management, rather than having to rely on a generalized bond index model.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697680701264804