Structured Products Dynamic Hedging

Recently, the market of structured products has been developing significantly in Russia. Many banks and investment companies offer a wide range of investment strategies that promise higher returns than bank deposits. There are many different products available to suit the tastes of both risk-tolerant and risk-averse investors. One of the main goals of bank traders, along with making a profit, is to ensure the stability of the trading book against risks. The more complex the product, the more difficult it is to hedge. An interest in dynamic hedging of complex structured products initiated this work. That is why I chose a product presented on the derivatives market of one of largest Russian banks and tried to reproduce the principle of its dynamic hedging. I reviewed the components of the product that affect its pricing. First of all, there were estimated such Greeks of the product as sensitivity the value of the product to changes in the price of the underlying asset, sensitivity to volatility and interest rates changes. In this article, I proposed the Monte-Carlo based model that can help banks to dynamically hedge financial products in discrete time using the complex structured prodcts: the Investment Bond of Sberbank (a capital protection note that can be autocalled on certain observation dates and can pay an additional income that depends on the growth of the underlying asset price of the note) as an example in this thesis.