Why Buy a Structured Product from a Bank? : A combination of weighted products to outperform the market

Abstract:

Aim: The purpose of the thesis is to give small private investors an insight the financial world of derivatives and to show that an investor does not need to consult with an advisor in order to make decisions about the investments. The aim was to show through a new product that a small investor can beat the market return.

Method: The method used in the thesis is to collect data over a three year period for an option, a bull ETF and a treasury bill. The database DataStream was used to obtain statistics of the option and the Treasury bill and Nasdaq OMX Nordic was used for the Bull ETF. We calculated the expected return and variance of each in order to use in the portfolio. Having the information needed we then used a trial-and-error method to calculate the weight each component will be given, with the help of Excel and its Solver add-on.

Result & Conclusion: The results were surprising in that over the three year period the product had a 100% increase, while the market only went up by 30%. The major reason for the products strong return was that the daily earnings were shifted everyday so that the weights remained constant throughout the life of the product. The issue with the product was that no transaction costs were included in the calculations, and as there would be at least one transaction per day the costs would be enormous for the given product.

Suggestions for Further Research: As one of the limitations for the thesis was that no transactions cost were included, one idea for further research could be to calculate the transaction costs as well as seeing if there is a method to minimize them so that the product could be profitable.

Contribution to the Field: To our knowledge we are the first to test theses three components in order to from a structured product. Through our method interested parties could do the same with other components or retest our product. We have showed through our method one way to create your own structured product.