Valuation of Structured Investment Products: An Empirical Study of Worst-of Barrier Reverse Convertibles in Switzerland

Abstract: The thesis examines the valuation of Worst-of Barrier Reverse Convertibles on the Swiss market. This structured product which embeds an exotic option is valued by using an option pricing model of a professional product issuer. We calculate the theoretical price of 434 products and estimate the market values under a given pricing scheme. By employing a regression-based approach, we analyze factors potentially being liable for deviations of actual market prices from theoretical prices. We further use the estimated market values as a benchmark and survey under which circumstances pricing differences between actual market prices and estimated benchmark prices decrease or increase. The analysis reveals that significant factors for explaining deviations between market prices and theoretical prices are difficult to find. However, it is shown that differences between actual market prices and benchmark prices decrease both with decreasing time to maturity and when one or more of the underlying assets have touched the barrier level.