| dc.description.abstract | Structured notes are tailor made products which are created by financial engineering. In the past, global depression economy introduced low interest rates. Under this background, structured notes developed quickly to fit the investor’s demand. However, in recent years, investors expect interest rates to increase. No matter how fast the rates increase, these expectations have resulted in common structured notes, which focus on low interest rates and have become unpopular in the market.
Generally speaking, structured notes can be divided into two categories by their underlying assets: equity linked notes and interest rate linked notes. There are many payment methods in structured notes. Here, we try to focus on one of these payment methods – Target redemption. A target redemption note contract has been issued by ING Belgium international finance S.A. according to the Libor Market model, in order to construct an interest rate term structure and to value this product. Owing to the fact that forward rates under the Libor Market model exist as a state-dependent drift term, recombining lattices is not able to evolve the interest rate dynamics. Instead, we use the Monte Carlo simulation to do this job. In addition, we will also introduce the concept of hedge for products of this target redemption note contract.
At the end of our research, we tried to modify this product contract. After having modified the conditions of contract, we analyzed their values as well as the average maturity of the notes. With these results, we hope to bring contributions to the issuer and the investor. | en_US |