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Designing Minimum Guaranteed Return Funds

In: Stochastic Optimization Methods in Finance and Energy

Author

Listed:
  • Michael A.H. Dempster

    (University of Cambridge
    Cambridge Systems Associates Ltd.)

  • Matteo Germano

    (Pioneer Investment Management Ltd.)

  • Elena A. Medova

    (Iberdrola)

  • Muriel I. Rietbergen

    (Securitisation & Asset Monetisation Group, Morgan Stanley)

  • Francesco Sandrini

    (University of Calabria)

  • Mike Scrowston

    (Pioneer Investment Management Ltd.)

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

  • Michael A.H. Dempster & Matteo Germano & Elena A. Medova & Muriel I. Rietbergen & Francesco Sandrini & Mike Scrowston, 2011. "Designing Minimum Guaranteed Return Funds," International Series in Operations Research & Management Science, in: Marida Bertocchi & Giorgio Consigli & Michael A. H. Dempster (ed.), Stochastic Optimization Methods in Finance and Energy, edition 1, pages 21-42, Springer.
    • Handle: RePEc:spr:isochp:978-1-4419-9586-5_2
    DOI: 10.1007/978-1-4419-9586-5_2
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