Contingent claim valuation: The case of advanced index certificates

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Academy of Accounting and Financial Studies Journal


In this paper we introduce a new financial product named Advanced Index Certificates and we provide detailed descriptions of the product specifications. We show that the payoff of an Advanced Index Certificate can be duplicated by the combination of a zero coupon bond, a call option on the index and a put option on the index. We develop pricing formulas to price the certificates. We apply the pricing models to a certificate issued by Bayerische Hypo- und Vereinsbank AG as an example to examine how well the model fits empirical data. Finally, a detailed survey of the 1.4 billion Advanced Index Certificates market for 36 issues outstanding on August 2005 is presented and the profitability in the primary market is examined. The results are in line with previous studies pricing other structured products. Moreover, using the sample of Outperformance Certificates from the Hernandez et al.(2007) study and the sample of Bonus Certificates from the Hernandez et al. (2008) study we test whether Advanced Index Certificates are mispriced more or less than the other structured products. The results show a significant positive difference.

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