Implicit Hedging and Liquidity Costs of Structured Products-Reference-Cited by-同舟云学术

Implicit Hedging and Liquidity Costs of Structured Products

Published:2023-09-07 Issue:9 Volume:16 Page:401
ISSN:1911-8074
Container-title:Journal of Risk and Financial Management
language:en
Short-container-title:JRFM

Author:

Avdiu Kujtim¹,Unger Stephan²

Affiliation:

1. Department of Statstics, Oesterreichische Nationalbank (OeNB), Otto-Wagner-Platz 3, 1090 Vienna, Austria

2. Department of Economics & Business, Saint Anselm College, Goffstown, NH 03102, USA

Abstract

This article analyzes the implicit hedging and liquidity costs of structured equity products offered by various financial institutions. We replicate several payoffs of structured products, compare the calculated fair values based on the Heston model as well as geometric Brownian motion, using various optimization techniques, and compare their fair values with the historic prices traded in the market. We find that implicit hedging costs range between 0.9% and 2.9% markup on the fair value, where we find the underlying market volatility to be the relevant driver of this range for complex structures, while market liquidity can be extracted as the only driver of markups for simple structures with no hedging requirements.

Publisher

MDPI AG

Subject

Finance,Economics and Econometrics,Accounting,Business, Management and Accounting (miscellaneous)

Link

https://www.mdpi.com/1911-8074/16/9/401/pdf

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