How does the underlying affect the risk-return profiles of structured products?

Abstract

Regulators of some of the major markets have adopted value at risk (VaR) as the risk measure for structured products. Under the mean-VaR framework, this paper discusses the impact of the underlying’s distribution on structured products.We expand the expected return and the VaR of a structured product with its underlying’s moments (mean, variance, skewness, and kurtosis), so that the impact of the moments can be investigated simultaneously. Results are tested by Monte Carlo and historical simulations.The findings showthat for the majority of structured products, underlyings with large positive skewness are preferred. The preferences for the variance and the kurtosis of the underlying are both ambiguous."