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Designing minimum guaranteed return funds

Author

Listed:
  • M. A. H. Dempster
  • M. Germano
  • E. A. Medova
  • M. I. Rietbergen
  • F. Sandrini
  • M. Scrowston

Abstract

In recent years there has been a significant growth of investment products aimed at attracting investors who are worried about the downside potential of the financial markets. This paper introduces a dynamic stochastic optimization model for the design of such products. The pricing of minimum guarantees as well as the valuation of a portfolio of bonds based on a three-factor term structure model are described in detail. This allows us to accurately price individual bonds, including the zero-coupon bonds used to provide risk management, rather than having to rely on a generalized bond index model.

Suggested Citation

  • M. A. H. Dempster & M. Germano & E. A. Medova & M. I. Rietbergen & F. Sandrini & M. Scrowston, 2007. "Designing minimum guaranteed return funds," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 245-256.
    • Handle: RePEc:taf:quantf:v:7:y:2007:i:2:p:245-256
    DOI: 10.1080/14697680701264804
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    Citations

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    Cited by:

    1. Dempster, M.A.H. & Tang, Ke, 2011. "Estimating exponential affine models with correlated measurement errors: Applications to fixed income and commodities," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 639-652, March.
    2. Robert Ferstl & Alex Weissensteiner, 2010. "Cash management using multi-stage stochastic programming," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 209-219.
    3. Weissensteiner, Alex, 2010. "Using the Black-Derman-Toy interest rate model for portfolio optimization," European Journal of Operational Research, Elsevier, vol. 202(1), pages 175-181, April.
    4. Robert Ferstl & Alexander Weissensteiner, 2011. "Backtesting Short-Term Treasury Management Strategies Based on Multi-Stage Stochastic Programming," Palgrave Macmillan Books, in: Gautam Mitra & Katharina Schwaiger (ed.), Asset and Liability Management Handbook, chapter 19, pages 469-494, Palgrave Macmillan.
    5. Diana Barro & Elio Canestrelli, 2012. "Dynamic tracking error with shortfall control using stochastic programming," Working Papers 2012_18, Department of Economics, University of Venice "Ca' Foscari", revised 2012.
    6. M. A. H. Dempster & E. A. Germano & M. Medova & M. I. Rietbergen & F. Sandrini & M. Scrowston & N. Zhang, 2007. "DC pension fund benchmarking with fixed-mix portfolio optimization," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 365-370.
    7. Michael A H Dempster & Elena A Medova & Michael Villaverde, 2010. "Long-term interest rates and consol bond valuation," Journal of Asset Management, Palgrave Macmillan, vol. 11(2), pages 113-135, June.
    8. Valle, C.A. & Meade, N. & Beasley, J.E., 2014. "Absolute return portfolios," Omega, Elsevier, vol. 45(C), pages 20-41.
    9. Geyer, Alois & Hanke, Michael & Weissensteiner, Alex, 2010. "No-arbitrage conditions, scenario trees, and multi-asset financial optimization," European Journal of Operational Research, Elsevier, vol. 206(3), pages 609-613, November.
    10. Xi Yang & Jacek Gondzio & Andreas Grothey, 2010. "Asset liability management modelling with risk control by stochastic dominance," Journal of Asset Management, Palgrave Macmillan, vol. 11(2), pages 73-93, June.

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