Structured equity products are designed to combine stocks (or indices) with either plain vanilla or exotic derivatives in a bundle. For valuation of structured
product, Monte-Carlo simulation method is adopted because a closed-form solution is not readily attainable due to its complexity. It is required the premised process. The present study investigates which process is valid under two metrics for the structured product. First metric focuses on capturing the right distribution of the underlying asset. Second metric focuses on minimizing hedge error. Considering four models, which are GBM, non-linear GARCH, jump-diffusion model, variance-gamma model(VGM), I verify that VGM is the most appropriate model in respect of the first metric. Furthermore, under dynamic hedging strategy, I verify that VGM implies the lowest hedge error in respect of the second metric. Therefore, I suggest that VGM can be considered as more proper process for structured products in compare with other prevailing processes.
Key words: Structured Products, Variance-Gamma Model, Reverse Convertible
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