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 inQuantitative finance Vol. 7; no. 2; pp. 245 - 256
Main Authors Dempster, M. A. H., Germano, M., Medova, E. A., Rietbergen, M. I., Sandrini, F., Scrowston, M.
Format Journal Article
LanguageEnglish
Published Bristol Routledge 01.04.2007
Taylor and Francis Journals
Taylor & Francis Ltd
SeriesQuantitative Finance
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