An Analytic Solution for Valuing Guaranteed Equity Securities

Lee, David (2023): An Analytic Solution for Valuing Guaranteed Equity Securities.

Abstract

Equity-linked securities with a guaranteed amount have some specific interesting features for investors, like downside protection and capital appreciation. The contract has a guaranteed return plus a payment linked to the performance of a basket of equities or indices averaged over a certain period. This article presents an analytical model for valuing equity-linked notes and computing the corresponding hedge ratios. The model appears to be accurate over a wide range of valuation parameters based on numerical studies. Finally, we use the model to value a segregated fund with a guarantee amount at maturity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Equity-linked securities, segregated fund, asset pricing, derivative valuation, hedge ratio.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D46 - Value Theory; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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