THE INVESTMENT CERTIFICATES IN THE ITALIAN MARKET: A COMPARISON OF QUOTED AND ESTIMATED PRICES

Abstract

Investment certificates are securitized derivatives built as a combination of financial instruments. The financial engineering process aims to create new payoff profiles that allow investors to diversify or to hedge the risk of their portfolios. Such instruments are relatively challenging to price, as highlighted in the recent publications for other European markets. The aim of this paper is to analyze whether in the Italian market there are also differences between the quoted price and the estimated price obtained applying a standard pricing approach well known in the literature. In particular, we analyze three representative certificates, belonging to the classes of target coupon certificates and autocallable certificates, that have been most appreciated by the investors during the last years. To evaluate the price, we propose a Monte Carlo approach that computes directly the payoff of the certificates on a set of scenarios for the evolution of the underlying asset. Moreover, studying the payoff profile of the certificates, we investigate and comment on the recent regulatory debate on “complexity”. We show that complexity, the new parameter behind return and risk, should not be necessarily associated with the engineering level of the financial products and that, sometimes, complexity is not associated with risk.