Prisfastsættelse af hybridobligationer: Pricing of index linked notes

Martin Samantha Frederiksen

Student thesis: Master thesis


The subject of the thesis is to evaluate the fair value principle of index linked notes. The valuation and conclusion has one practical case at its centre. The main objective is to examine whether the issuer value of index linked notes is said to be fair to the private investor, in regards to pricing the theoretical zero coupon and option value. The thesis can be considered in three parts. Part one describes - in overall terms - the development of the Danish market for index linked notes. This part also describes the basic terms and structure of the index linked notes. Part two contains theoretical reflections and descriptions regarding the input for the pricing models. The practical pricing is done by a number of Monte Carlo simulations which lies within the Black- Scholes environment and assumptions. Part three contains the case and the corresponding results of the Monte Carlo simulations. It is in this part that the comparison between the theoretical zero coupon and option price takes place. The case includes three different option types with the same underlying asset. The underlying asset is the currency exchange cross USD/DKK. The currency linked notes were issued by two of the closed competitors in the Danish market, namely Nordea and Garanti Invest. This part also holds a suggestive alternative to the index linked notes. It is concluded that the index linked notes in this case are too expensive compared to the theoretical prices. The theoretical prices confirm that the private investor is not fairly compensated through the index linked notes and that a direct investment in the underlying asset would be preferable. Furthermore the suggestive alternative investment illustration shows that the private investor should consider constructing a portfolio themselves with the same risk structure as the index linked notes in order to benefit directly from the upside in the underlying.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2008
Number of pages144