Abstract ▼ AI-Helper

This thesis investigates whether the structured notes pricing model can explain both the market price and some distinctive features of the market. The pricing model is designed through the Hull and White (1990) model and the Jarrow and Turnbull (1995) model. The structured notes market has two outst...

This thesis investigates whether the structured notes pricing model can explain both the market price and some distinctive features of the market. The pricing model is designed through the Hull and White (1990) model and the Jarrow and Turnbull (1995) model. The structured notes market has two outstanding characteristics. The first is that the market compensates the initial maker of structured notes for his/her contribution of creating new financial instruments. The second is that there are some differences in market prices among the instruments due to liquidity The empirical research is performed using the trading data of structured notes in the Korean markets from January 2002 to October 2004. The empirical results show the difference between the model prices and the observed market prices is on average 0.9% of the market prices after October 2003. Also, the model can explain the two outstanding market characteristics mentioned previously. The model price is lower than the observed market price when the instruments are issued, and higher when the instruments are traded in the secondary market. The model can partially exploit the price difference among the instruments due to liquidity. However, it is not proper to price option embedded instruments with this model. Finally, although the model is limited in terms of pricing option embedded instruments, it can explain market phenomena.

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