CASE STUDY IN FINANCIAL ENGINEERING: AIRBAG CERTIFICATE WITH CAP LINKED TO STOXX® EUROPE 600 (PRICE INDEX)

This study evaluates the pricing and risk management of a structured product, focusing on the Airbag Certificate with Cap linked to the STOXX® Europe 600 index, issued by Deutsche Bank AG. Considering four different valuation dates, the research employs the three main option pricing models - the Black-Scholes model, the binomial tree and Monte Carlo simulation - to assess the certificate’s fair value. Furthermore, delta hedging strategies are explored, taking into account transaction costs, to evaluate their effectiveness in risk mitigation. A probability-based analysis of payoffs is conducted using Monte Carlo simulation to provide further insights into potential returns. The results demonstrate high consistency among the three models, confirming their robustness in structured product valuation. Furthermore, the theoretical price is consistently lower than the market price on all valuation dates. The product is best suited for risk-averse investors that are seeking for partial downside protection, yet the difference between market and theoretical price emphasizes the relevance of detailed pricing analysis. In the overall, the findings provide valuable insights for investors and hedgers in structured product markets.