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Essay Available:
Pages:
2 pages/≈550 words
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4 Sources
Level:
Oxford
Subject:
Mathematics & Economics
Type:
Essay
Language:
English (U.S.)
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MS Word
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Pricing of structured product (Essay Sample)

Instructions:
The treasurer of a German Power Plant company importing coal from Australia is uncertain about the exact date when he will pay in Australian Dollars so tries to negotiate with his bank a forward contract that specifies a period during which delivery can be made. He wants to reserve the right to choose the exact delivery date to fit in with his own cash flows. Put yourself in the position of the bank. How would you price the product that the treasurer wants? source..
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Structured products’ pricing
As the bank, I would price the desired product required by the treasurer as follows. For instance, I would consider a variety of factors which have the capacity to influence structured pricing, especially within the case of forward contracts. An example within this case is expected interest rates. It is apparent that progressive changes are usually experienced regarding interest rates. Banks therefore have the capacity to estimate expected changes, based upon past experiences. Owing to the fact that interest rates highly influence experienced exchange rates, this turns out to be a useful factor upon which pricing regarding structured products may be based. Consideration regarding expected variations concerning interest rates makes it possible for the bank to choose suitable range within which the projected price may end up lying. In cases whereby passed experiences express highly varying interest rates, it is apparent that higher ranges will be considered regarding expected prices, whereas in cases whereby lower variation have been experienced, lower ranges will also be considered towards expected prices. Augmentation regarding interest rates steers decreased reverse convertible price, decreased participation note price and decreased auto-callable price.
Secondly, I will also put in to consideration issuers’ credit spread. Credit spread in this case may be perceived as yield difference amid various securities as a result of varying credit quality. Sources bring to our attention that credit spread signifies further net yield which may be earned by i...
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