How Suboptimal are Retail Products? An Analysis of Different Sources of Suboptimality

During recent decades, the variety of financial products has continuously grown. Besides the number of financial products, their complexity has also increased. Owing to this development, an investor has to choose between many different investment opportunities. The focus of this thesis is to analyze different sources of suboptimality of financial retail products and their influence on the investor’s utility. Therefore, we assume an expected constant relative risk aversion (CRRA) utility maximizing investor under the assumptions of the Black and Scholes model where the optimal payoff profile is given by a Constant-Mix strategy. Based upon the assumption that the financial market is only complete for the issuer of retail products, we determine suboptimal retail products from the investor's perspective, since she can only choose one of the offered products. In general, the corresponding payoff profiles differ from the overall optimal product. The main Chapter (Chapter 3) focuses on structured stylized products where the payoff granted to the investor depends on the performance of an underlying asset. Such products often contain a guarantee, a cap or even a path-dependent payoff feature. Thus, this part of the thesis analyzes, quantifies and compares the suboptimality which is introduced by different payoff features of structured stylized products. In Chapters 4 and 5, two existing classes of structured stylized products (Best Garant Certificates and Locally Capped Garant Certificates) are considered. Beside the analysis of suboptimality, the focus is on fair product design and on the return rate distribution. Chapter 6 refers to the analysis of the Best Garant Certificates and takes into account default risk which means that the issuer of the certificate can become insolvent before maturity. In Chapter 7 we consider the optimal product design of products with guarantees and caps from the both investor’s and the issuer’s perspective, allowing an embedded margin.


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Kaltepoth, S., 2016. How Suboptimal are Retail Products? An Analysis of Different Sources of Suboptimality.
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