Details of Research Outputs

Accumulators are highly path-dependent structured products that have been introduced in the over-thecounter (OTC) retail market in the last decade and become very popular in some Asian cities due to their speculative nature. A typical accumulator contract obligates an investor to buy a fixed quantity of an underlying asset at a strike price on each trading day within the term if the asset market price is higher than the strike price but lower than a knockout barrier, while the purchasing quantity of the day needs to be doubled if the asset price falls below the strike price on that day. Furthermore, if any day's market price reaches the knockout barrier, the contract is terminated. Despite its popularity, the accumulator's pricing formula is not well known, especially for its discrete barrier and periodic settlement features. This article first obtains the exact pricing formulae for both immediate and periodic settlement, assuming the knockout barrier is continuously monitored. When the barrier is discretely monitored, we obtain an approximated pricing formula. Through Monte Carlo simulation, we show that the approximation is quite accurate. With the pricing formulas, we further explain how to evaluate whether a contract fairly fits into its zero-cost structure as well as how to compute the Greek letters. Furthermore, the Monte Carlo simulated result is used to analyze the duration and the profit/loss distributions of the contract. A dramatic asymmetry is observed such that investors bear much higher risk than the issuers. And compared with winning investors, losing investors have much higher price risk and volatility risk.