Methodology

The pricing is the corner stone of a product quality. A structured product has embedded a return probability. If the pricing is bad, the product cannot be of quality.

We price the product through Monte Carlo simulations using market data; we decompose the bond part where the funding conditions are checked and the optional part where the volatility data, among others, are checked. The results are then compared to the issue price.

If a product is too complex, the starting price is difficult to check and afterwards the follow-up is difficult to ensure. In order to hedge their position banks have to take higher margins which reduce the return probability.

It is the case for products with reimbursement too complex or products whose underlying prices aren’t accessible on traditional financial database.

Most issuers guarantee on their term sheet a secondary market with a 1% bid-ask spread "under normal market conditions".

The reality is actually different.

Often there is no means of buying a product on the secondary market (no ask side) and the selling price (bid side) is impacted downward unilaterally for the sake of "non-normal market conditions". It is important to check those levels and reject them if there are out of the market.

In this part, the three main sensibility are detailed :

• underlying
• volatility
• interest rate

This is what is called in the financial lingo, the delta, vega and rho.

This part outlines some pitfalls or weaknesses to avoid but the positive points too. The pitfalls may be automatic reimbursement before maturity, individual performance limited on the upside and not on the downside, asian averaging for the reimbursement at maturity, American style protections (that can be cancelled if the level is reached during the option’s life) instead of European style options (where only the final level of the underlying is taken into consideration).

The positive points can be to take advantage of interesting volatility conditions, annual coupon reimbursement with memory effect, a good market timing in the underlying asset, ...

The product return is one of the corner stone in the investor choice. In this part, the annualized returns are plotted based on 1000 Monte Carlo simulation. This chart allows making its own mind about the potential return and the probability attached to those returns.