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The volatility target effect in structured investment products with capital protection

Author

Listed:
  • Sergio Albeverio

    (Universitaet Bonn
    HCM
    SFB 611
    BiBoS)

  • Victoria Steblovskaya

    (Bentley University)

  • Kai Wallbaum

    (Allianz Global Investors GmbH)

Abstract

Designing a structured investment product with capital protection which would be characterized by high capital protection level as well as high equity participation rate is a challenging task in the current market environment. Low interest rates and high volatility levels negatively affect the above key parameters of such investment products. One way to increase the participation rate of a structured investment product with a fixed capital protection level is to use a volatility target (VolTarget) strategy as an underlying asset for a financial option embedded in such a product. We introduce an extended VolTarget mechanism with interest rate dependent volatility target levels and provide a detailed comparative numerical study of European options linked to VolTarget strategies within a hybrid Heston–Vasičec model with stochastic volatility and stochastic interest rate.

Suggested Citation

  • Sergio Albeverio & Victoria Steblovskaya & Kai Wallbaum, 2018. "The volatility target effect in structured investment products with capital protection," Review of Derivatives Research, Springer, vol. 21(2), pages 201-229, July.
    • Handle: RePEc:kap:revdev:v:21:y:2018:i:2:d:10.1007_s11147-017-9138-2
    DOI: 10.1007/s11147-017-9138-2
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    References listed on IDEAS

    as
    1. Victoria Steblovskaya & Sergio Albeverio, 2002. "A model of financial market with several interacting assets. Complete market case," Finance and Stochastics, Springer, vol. 6(3), pages 383-396.
    2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    3. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    4. S. Albeverio & V. Steblovskaya & K. Wallbaum, 2013. "Investment instruments with volatility target mechanism," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1519-1528, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Luca Di Persio & Matteo Garbelli & Kai Wallbaum, 2021. "Forward-Looking Volatility Estimation for Risk-Managed Investment Strategies during the COVID-19 Crisis," Risks, MDPI, vol. 9(2), pages 1-16, February.

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    More about this item

    Keywords

    Volatility target strategy; Structured investment products with capital protection; Participation rate; Pricing of embedded option;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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