Valuation of Structured Products

Abstract

The market for structured products has grown dramatically in the past decade. Their diversity and complexity have led to the development of many different valuation approaches, and it is not always clear which approach to use to value a given product. In this article the authors discuss four approaches to valuing structured products: simulation of the linked financial instrument’s future values, numerical integration, decomposition, and partial differential equation approaches. As an example, the authors use all four approaches to value a common type of structured product, and discuss the virtues and pitfalls of each.