Financial Engineering With Options and Its Implementation for Issuing of New Financial Innovations

Abstract

Purpose: The purpose of the paper is to focus on innovative structured products − investment certificates. The paper shows the creation techniques of a new discount basket certificate using two-asset correlation options, which play the central role in financial engineering. The possibilities of investment using given certificates are investigated for potential investors. Methodology: Methodology of the paper is based on European style two-asset correlation options in analytical expression whose payoff is based on two underlying assets with two strike prices. Due to the lack of real-traded two asset correlation option data, own calculations of option premiums are processed in statistical program R. Also, the pricing of the new discount basket certificate is examines. Approach: Theoretical value of the new discount basket certificate with different levels of its parameters on the stocks Facebook and Google is obtained and it is performed the analysis of the profitability for to the investor at the maturity date. Also, there is showed which parameters the investor should pay attention when deciding to invest into the given investment certificate. Findings: Specific characteristics of each proposed certificate are pointed out and compared to each other with conclusion that every certificate can be the most profitable in specific price development of the underlying assets, but not in every price development. Ideas on how this certificate can be part of a personal investment portfolio are also presented.

Keywords

• financial engineering
• structured product
• discount basket certificate
• two-asset correlation option
• option pricing