Design of New Barrier Outperformance Certificates in Oil Market

Vincent Šoltés, Monika Harčariková

Abstract


This paper analyses new innovative financial products in oil market. New modified outperformance certificates, i.e. barrier reverse outperformance and capped barrier reverse outperformance certificates, belong to the group of partial guaranteed investment products due to security buffer. Barrier reverse outperformance and capped barrier reverse outperformance certificates are designed with the aim to make a disproportionately higher profit in bear market. Detailed descriptions of the certificates´ profit functions in analytical form are provided. There is shown that the certificates´ payoff is created through the combination of traditional financial instrument and derivative products, especially American vanilla and barrier options. The principles of the financial engineering are explored to the investment certificates creation through the analytical expression of the American style of vanilla and barrier call/put options. Pricing formulas are developed for these certificates with specification of conditions under which the issuer is profitable in the primary market. Then several certificates for these types of innovative products associated with the United States Brent Oil ETF on 1st December 2014 are designed, analysed and compared with the best results for the investor at the future trade date. Our approach is based on real-traded American vanilla options data gained from Bloomberg. The barrier option premiums are calculated according to Haug option pricing in Bloomberg due to lack of real-traded barrier option. The main aim is to prove the nature of barrier reverse outperformance and capped barrier reverse outperformance certificates creations with the increasing of the intellectualization of all potential investors.

DOI: http://dx.doi.org/10.5755/j01.ee.28.3.11481


Keywords


barrier reverse outperformance certificate; capped barrier reverse outperformance certificate; vanilla options; barrier options; option pricing

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Print ISSN: 1392-2785
Online ISSN: 2029-5839