Munich Personal RePEc Archive

An Analytic Solution for Valuing Guaranteed Equity Securities

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

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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.

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