The Added Value of Structured Products as a Portfolio

Master Thesis Investment Analysis

The Added Value of Structured Products as

a Portfolio

BsC FJP Heesters

University of Tilburg

amp

Van Lanschot Bankiers

July 2011

Master- student at University of Tilburg the Netherlands

2 | P a g e

Abstract

The financial service industry knows an area which has grown exceptionally fast in recent years namely

structured products These products more and more form a core business for both end consumers and product

manufacturers like banks One of the products developed en maintained by lsquoF van Lanschot Bankiersrsquo concerns

the Index Guarantee Contract (hereafter lsquoIGCrsquo) The product is held by a significant group of lsquoVan Lanschotsrsquo

clients as being part of a certain portfolio consisting of multiple financial instruments Not offered to the clients

though is a portfolio consisting entirely out of (a) structured product(s) Regarding the degree of specification

of this research the structured product of concern will be one specific IGC launched by lsquoVan Lanschot

Bankiersrsquo In order to realize a portfolio as such research needs to be conducted on the possible added value of

this portfolio relative to certain benchmarks This added value subsequently should be expressed in (a) certain

value(s) upon which specific conclusions can be drawn in historical- and in future perspective Once this added

value is determined translation is preferred to offer potential practical solutions These are the main issues

which are conducted in this research in order to give answer to the main research question What is the added

value of structured products as a portfolio

3 | P a g e

Introduction 4

1 Structured products and their Characteristics 5

11 Explaining Structured Products 5

12 Categorizing the Structured product 5

13 The Characteristics 6

14 Structured products in Time Perspective 7

15 Important Properties of the IGC 11

16 Valuing the IGC 14

17 Chapter Conclusion 16

2 Expressing lsquoadded valuersquo 17

21 General 17

22 The (regular) Sharpe Ratio 19

23 The Adjusted Sharpe Ratio 21

24 The Sortino Ratio 21

25 The Omega Sharpe Ratio 22

26 The Modified Sharpe Ratio 23

27 The Modified GUISE Ratio 24

28 Ratios vs Risk Indications 25


3 Historical Analysis 29

31 General 29

32 The performance of the IGC 29

33 The Benchmarks 30

34 The Influence of Important Features 31


4 Scenario Analysis 34

41 General 34

42 Base of Scenario Analysis 34

43 Result of a Single IGC- Portfolio 37

44 Significant Result of a Single IGC- Portfolio 39


5 Scenario Analysis multiple IGC- Portfolio 41

51 General 4141

52 The Diversification Effect 41

53 Optimizing Portfolios 42

54 Results of a multi- IGC Portfolio 44


6 Practical- solutions 46

61 General 46

62 A Bank focused solution 46


7 Conclusion 50

Appendix 52

References 76

4 | P a g e

Introduction




the lsquoIndex Guarantee Contractrsquo (hereafter lsquoIGCrsquo) The product is held by a significant group of lsquoVan Lanschotsrsquo




Bankiersrsquo In order to realize an IGC- portfolio as such research needs to be conducted on the possible added

value of this portfolio relative to certain benchmarks This leads to the main research question What is the

added value of structured products as a portfolio Current research shows that the added value of structured

products as a portfolio is that it can generate more return per unit risk for the owner of the portfolio Here

several ratios are consulted to express this added value whereas each ratio holds the return per unit risk Due

to different risk indications by holders of portfolios several are incorporated by the research each basically

embracing another ratio which best suits Current research historically shows that despite itsrsquo small sample

size altering the important determinant lsquoprovisionrsquo can result in the IGC- portfolio generating an added value

when compared to (some of) the fictitious portfolios containing stock - and government bond trackers

Furthermore current research shows that the same occurs when placing the IGC- portfolio in a future context

the underlying stock index being the benchmark Similar ratios are calculated to express this added value

Additionally a portfolio is introduced in future context which incorporates multiple IGCrsquos where each holds

another underlying stock index The diversification effect here shows the added value can be regarded as even

larger when compared to a single IGC portfolio Last serves as base to conduct future research on the matter

At the end current research provides possible practical solutions which may ameliorate some of the banksrsquo

(daily) businesses Before exercising these tough further research forms a requisite

5 | P a g e

1 Structured products and their Characteristics

11 Explaining Structured Products

In literature structured products are defined in many ways One definition and metaphoric approach is that a

structured product is like building a car1 The car represents the underlying asset and the carrsquos (paid for)

options represent the characteristics of the product An additional example to this approach Imagine you want

to drive from Paris to Milan for that purpose you buy a car You may think that the road could be long and

dangerous so you buy a car with an airbag and anti-lock brake system With these options you want to enlarge

the probability of arrival In the equity market buying an airbag and anti-lock brake system would be equal to

buying a capital guarantee on top of your stock investment This rather simple action combining stock

exposure with a capital guarantee would already form a structured product

As partially indicated by this example the overall purpose of a structured product is to actively influence the

reward for taking on risk which can be adjusted towards the financial needs and goals of the specific investor

Translated towards lsquoVan Lanschot Bankiersrsquo the financial needs of the specific investor are the possible

financial goals set by the bank and its client when consulted

Structured products come in many flavours regarding different components and characteristics In following

chapter the structured product chosen will be categorised characteristics and properties of the product will be

treated the valuation of each component of the product will be treated and the specific structured product

researched on shall be chosen

12 Categorizing the Structured product

The structured product researched on in this thesis concerns the lsquoIndex Guarantee Contractrsquo (hereafter lsquoIGCrsquo)

issued by lsquoVan Lanschot Bankiersrsquo in the Netherlands As partially indicated by name this specific structured

product falls under the category lsquoCapital Protectionrsquo as stated in the figure on the next page

Figure 1 All structured products can be divided into different categories taking the expected return and the risk as determinants

Source European Structured Investment Products Association (EUSIPA)

1 A Bluumlmke (2009) lsquoHow to invest in Structured products A guide for Investors and Asset Managers rsquo ISBN 978-0-470-74679

6 | P a g e

Therefore it can be considered a relatively safe product when compared to other structured products Within

this category differences of risk partially appear due to differences in fill ups of each component of the

structured product Generally a structured product which falls under the category lsquocapital protectionrsquo

incorporates a derivative part a bond part and provision Thus the derivative and the bond used in the product

partially determine the riskiness of the product The derivative used in the IGC concerns a call option whereas

the bond concerns a zero coupon bond issued by lsquoVan Lanschot Bankiersrsquo At the main research date

(November 3rd 2010) the bond had a long term rating of A- (lsquoStandard amp Poorrsquosrsquo) The lower this credit rating

the higher the probability of default of the specific fabricator Thus the credit rating of the fabricator of the

component of the structured product also determines the level of risk of the product in general For this risk

taken the investor though earns an additional return in the form of credit spread In case of default of the

fabricator the amount invested by the client can be lost entirely or can be recovered partially up to the full

Since in future analysis it is hard to assume a certain recovery rate one assumption made by this research is

that there is no probability of default This means when looking at future research that ceteris paribus the

higher the credit spread the higher the return of the product since no default is possible An additional reason

for the assumption made is that incorporating default fades some characterizing statistical measures of the

structured product researched on These measures will be treated in the first paragraph of second chapter

Before moving on to the higher degree of specification regarding the structured product researched on first

some characteristics (as the car options in the previous paragraph) need to be clarified

13 The Characteristics

As mentioned in the car example to explain a structured product the car contained some (paid for) options

which enlarged the probability of arrival Structured products also (can) contain some lsquopaid forrsquo characteristics

that enlarge the probability that a client meets his or her target in case it is set After explaining lsquothe carrsquo these

characteristics are explained next

The Underlying (lsquothe carrsquo)

The underlying of a structured product as chosen can either be a certain stock- index multiple stock- indices

real estate(s) or a commodity Focusing on stock- indices the main ones used by lsquoVan Lanschotrsquo in the IGC are

the Dutch lsquoAEX- index2rsquo the lsquoEuroStoxx50- index3rsquo the lsquoSampP500-index4rsquo the lsquoNikkei225- index5rsquo the lsquoHSCEI-

index6rsquo and a world basket containing multiple indices

The characteristic Guarantee Level

This is the level that indicates which part of the invested amount is guaranteed by the issuer at maturity of the

structured product This characteristic is mainly incorporated in structured products which belong to the

2 The AEX index Amsterdam Exchange index a share market index composed of Dutch companies that trade on Euronext Amsterdam

3 The EuroStoxx50 Index is a share index composed of the 50 largest companies in the Eurozone

4 The Standardamppoorrsquos500 is the leading index for Americarsquos share market and is composed of the largest 500 American companies 5 The Nikkei 225(NKY) is the leading index for the Tokyo share market and is composed of the largest 225 Japanese companies

6 The Hang Seng (HSCEI) is the leading index for the Hong Kong share market and is composed of the largest 45 Chinese companies

7 | P a g e

capital protection- category (figure 1) The guaranteed level can be upmost equal to 100 and can be realized

by the issuer through investing in (zero- coupon) bonds More on the valuation of the guarantee level will be

treated in paragraph 16

The characteristic The Participation Percentage

Another characteristic is the participation percentage which indicates to which extend the holder of the

structured product participates in the value mutation of the underlying This value mutation of the underlying

is calculated arithmetic by comparing the lsquocurrentrsquo value of the underlying with the value of the underlying at

the initial date The participation percentage can be under equal to or above hundred percent The way the

participation percentage is calculated will be explained in paragraph 16 since preliminary explanation is

required

The characteristic Duration

This characteristic indicates when the specific structured product when compared to the initial date will

mature Durations can differ greatly amongst structured products where these products can be rolled over into

the same kind of product when preferred by the investor or even can be ended before the maturity agreed

upon Two additional assumptions are made in this research holding there are no roll- over possibilities and

that the structured product of concern is held to maturity the so called lsquobuy and hold- assumptionrsquo

The characteristic Asianing (averaging)

This optional characteristic holds that during a certain last period of the duration of the product an average

price of the underlying is set as end- price Subsequently as mentioned in the participation percentage above

the value mutation of the underlying is calculated arithmetically This means that when the underlying has an

upward slope during the asianing period the client is worse off by this characteristic since the end- price will be

lower as would have been the case without asianing On the contrary a downward slope in de asianing period

gives the client a higher end- price which makes him better off This characteristic is optional regarding the last

24 months and is included in the IGC researched on

There are more characteristics which can be included in a structured product as a whole but these are not

incorporated in this research and therefore not treated Having an idea what a structured product is and

knowing the characteristics of concern enables explaining important properties of the IGC researched on But

first the characteristics mentioned above need to be specified This will be done in next paragraph where the

structured product as a whole and specifically the IGC are put in time perspective

14 Structured products in Time Perspective

Structured products began appearing in the UK retail investment market in the early 1990rsquos The number of

contracts available was very small and was largely offered to financial institutions But due to the lsquodotcom bustrsquo

8 | P a g e

in 2000 and the risk aversion accompanied it investors everywhere looked for an investment strategy that

attempted to limit the risk of capital loss while still participating in equity markets Soon after retail investors

and distributors embraced this new category of products known as lsquocapital protected notesrsquo Gradually the

products became increasingly sophisticated employing more complex strategies that spanned multiple

financial instruments This continued until the fall of 2008 The freezing of the credit markets exposed several

risks that werenrsquot fully appreciated by bankers and investors which lead to structured products losing some of

their shine7

Despite this exposure of several risks in 2008 structured product- subscriptions have remained constant in

2009 whereas it can be said that new sales simply replaced maturing products

Figure 2 Global investments in structured products subdivided by continent during recent years denoted in US billion Dollars

Source Structured Retail Productscom

Apparently structured products have become more attractive to investors during recent years Indeed no other

area of the financial services industry has grown as rapidly over the last few years as structured products for

private clients This is a phenomenon which has used Europe as a springboard8 and has reached Asia Therefore

structured products form a core business for both the end consumer and product manufacturers This is why

the structured product- field has now become a key business activity for banks as is the case with lsquoF van

Lanschot Bankiersrsquo

lsquoF van Lanschot Bankiersrsquo is subject to the Dutch market where most of its clients are located Therefore focus

should be specified towards the Dutch structured product- market

7 httpwwwasiaonecomBusiness

8 httpwwwpwmnetcomnewsfullstory

9 | P a g e

Figure 3 The European volumes of structured products subdivided by several countries during recent years denoted in US billion Dollars The part that concerns the Netherlands is highlighted


As can be seen the volumes regarding the Netherlands were growing until 2007 where it declined in 2008 and

remained constant in 2009 The essential question concerns whether the (Dutch) structured product market-

volumes will grow again hereafter Several projections though point in the same direction of an entire market

growth National differences relating to marketability and tax will continue to demand the use of a wide variety

of structured products9 Furthermore the ability to deliver a full range of these multiple products will be a core

competence for those who seek to lead the industry10 Third the issuers will require the possibility to move

easily between structured products where these products need to be fully understood This easy movement is

necessary because some products might become unfavourable through time whereas product- substitution

might yield a better outcome towards the clientsrsquo objective11

The principle of moving one product to another

at or before maturity is called lsquorolling over the productrsquo This is excluded in this research since a buy and hold-

assumption is being made until maturity Last projection holds that healthy competitive pressure is expected to

grow which will continue to drive product- structuring12

Another source13 predicts the European structured product- market will recover though modestly in 2011

This forecast is primarily based on current monthly sales trends and products maturing in 2011 They expect

there will be wide differences in growth between countries and overall there will be much more uncertainty

during the current year due to the pending regulatory changes

9 THailes (2009) Structured products in Challenging Times structprodchalltimesspeech ISDA

10 Wolfgang Breuer (2009) Retail banking and behavioral financial engineering The case of structured products Journal of

Banking amp Finance Volume 31 Issue 3 March 2007 Pages 827-844 11 Brian C Twiss (2005) Forecasting market size and market growth rates for new products Journal of Product Innovation

Management Volume 1 Issue 1 January 1984 Pages 19-29 12

JD Coval JW Jurek E Stafford (2008) The Economics of Structured Finance Harvard Business School Finance

Working Paper No 09-060 13

StructuredRetailProductscomoutlook2010

10 | P a g e

Several European studies are conducted to forecast the expected future demand of structured products

divided by variant One of these studies is conducted by lsquoGreenwich Associatesrsquo which is a firm offering

consulting and research capabilities in institutional financial markets In February 2010 they obtained the

following forecast which can be seen on the next page

Figure 4 The expected growth of future product demand subdivided by the capital guarantee part and the underlying which are both parts of a structured product The number between brackets indicates the number of respondents

Source 2009 Retail structured products Third Party Distribution Study- Europe

Figure 4 gives insight into some preferences

A structured product offering (100) principal protection is preferred significantly

The preferred underlying clearly is formed by Equity (a stock- Index)

Translating this to the IGC of concern an IGC with a 100 guarantee and an underlying stock- index shall be

preferred according to the above study Also when looking at the short history of the IGCrsquos publically issued to

all clients it is notable that relatively frequent an IGC with complete principal protection is issued For the size

of the historical analysis to be as large as possible it is preferred to address the characteristic of 100

guarantee The same counts for the underlying Index whereas the lsquoEuroStoxx50rsquo will be chosen This specific

underlying is chosen because in short history it is one of the most frequent issued underlyings of the IGC Again

this will make the size of the historical analysis as large as possible

Next to these current and expected European demands also the kind of client buying a structured product

changes through time The pie- charts on the next page show the shifting of participating European clients

measured over two recent years

11 | P a g e

Figure5 The structured product demand subdivided by client type during recent years

Important for lsquoVan Lanschotrsquo since they mainly focus on the relatively wealthy clients


This is important towards lsquoVan Lanschot Bankiersrsquo since the bank mainly aims at relatively wealthy clients As

can be seen the shift towards 2009 was in favour of lsquoVan Lanschot Bankiersrsquo since relatively less retail clients

were participating in structured products whereas the two wealthiest classes were relatively participating

more A continuation of the above trend would allow a favourable prospect the upcoming years for lsquoVan

Lanschot Bankiersrsquo and thereby it embraces doing research on the structured product initiated by this bank

The two remaining characteristics as described in former paragraph concern lsquoasianingrsquo and lsquodurationrsquo Both

characteristics are simply chosen as such that the historical analysis can be as large as possible Therefore

asianing is included regarding a 24 month (last-) period and duration of five years

Current paragraph shows the following IGC will be researched

Now the specification is set some important properties and the valuation of this specific structured product

need to be examined next

15 Important Properties of the IGC

Each financial instrument has its own properties whereas the two most important ones concern the return and

the corresponding risk taken The return of an investment can be calculated using several techniques where

12 | P a g e

one of the basic techniques concerns an arithmetic calculation of the annual return The next formula enables

calculating the arithmetic annual return

(1) This formula is applied throughout the entire research calculating the returns for the IGC and its benchmarks

Thereafter itrsquos calculated in annual terms since all figures are calculated as such

Using the above technique to calculate returns enables plotting return distributions of financial instruments

These distributions can be drawn based on historical data and scenariorsquos (future data) Subsequently these

distributions visualize return related probabilities and product comparison both offering the probability to

clarify the matter The two financial instruments highlighted in this research concern the IGC researched on

and a stock- index investment Therefore the return distributions of these two instruments are explained next

To clarify the return distribution of the IGC the return distribution of the stock- index investment needs to be

clarified first Again a metaphoric example can be used Suppose there is an initial price which is displayed by a

white ball This ball together with other white balls (lsquosame initial pricesrsquo) are thrown in the Galton14 Machine

Figure 6 The Galton machine introduced by Francis Galton (1850) in order to explain normal distribution and standard deviation

Source httpwwwyoutubecomwatchv=9xUBhhM4vbM

The ball thrown in at top of the machine falls trough a consecutive set of pins and ends in a bar which

indicates the end price Knowing the end- price and the initial price enables calculating the arithmetic return

and thereby figure 6 shows a return distribution To be more specific the balls in figure 6 almost show a normal

14

Francis Galton inventor of the lsquoQuincunxrsquo also known as the Galton board thereby explaining normal distribution and the

standard deviation (1850)

13 | P a g e

return distribution of a stock- index investment where no relative extreme shocks are assumed which generate

(extreme) fat tails This is because at each pin the ball can either go left or right just as the price in the market

can go either up or either down no constraints included Since the return distribution in this case almost shows

a normal distribution (almost a symmetric bell shaped curve) the standard deviation (deviation from the

average expected value) is approximately the same at both sides This standard deviation is also referred to as

volatility (lsquoσrsquo) and is often used in the field of finance as a measurement of risk With other words risk in this

case is interpreted as earning a return that is different than (initially) expected

Next the return distribution of the IGC researched on needs to be obtained in order to clarify probability

distribution and to conduct a proper product comparison As indicated earlier the assumption is made that

there is no probability of default Translating this to the metaphoric example since the specific IGC has a 100

guarantee level no white ball can fall under the initial price (under the location where the white ball is dropped

into the machine) With other words a vertical bar is put in the machine whereas all the white balls will for sure

fall to the right hand site

Figure 7 The Galton machine showing the result when a vertical bar is included to represent the return distribution of the specific IGC with the assumption of no default risk

Source homemade

As can be seen the shape of the return distribution is very different compared to the one of the stock- index

investment The differences

The return distribution of the IGC only has a tail on the right hand side and is left skewed

The return distribution of the IGC is higher (leftmost bars contain more white balls than the highest

bar in the return distribution of the stock- index)

The return distribution of the IGC is asymmetric not (approximately) symmetric like the return

distribution of the stock- index assuming no relative extreme shocks

These three differences can be summarized by three statistical measures which will be treated in the upcoming

chapter

So far the structured product in general and itsrsquo characteristics are being explained the characteristics are

selected for the IGC (researched on) and important properties which are important for the analyses are

14 | P a g e

treated This leaves explaining how the value (or price) of an IGC can be obtained which is used to calculate

former explained arithmetic return With other words how each component of the chosen IGC is being valued

16 Valuing the IGC

In order to value an IGC the components of the IGC need to be valued separately Therefore each of these

components shall be explained first where after each onesrsquo valuation- technique is explained An IGC contains

following components

Figure 8 The components that form the IGC where each one has a different size depending on the chosen

characteristics and time dependant market- circumstances This example indicates an IGC with a 100

guarantee level and an inducement of the option value trough time provision remaining constant

Source Homemade

The figure above summarizes how the IGC could work out for the client Since a 100 guarantee level is

provided the zero coupon bond shall have an equal value at maturity as the clientsrsquo investment This value is

being discounted till initial date whereas the remaining is appropriated by the provision and the call option

(hereafter simply lsquooptionrsquo) The provision remains constant till maturity as the value of the option may

fluctuate with a minimum of nil This generates the possible outcome for the IGC to increase in value at

maturity whereas the surplus less the provision leaves the clientsrsquo payout This holds that when the issuer of

the IGC does not go bankrupt the client in worst case has a zero return

Regarding the valuation technique of each component the zero coupon bond and provision are treated first

since subtracting the discounted values of these two from the clientsrsquo investment leaves the premium which

can be used to invest in the option- component

The component Zero Coupon Bond

This component is accomplished by investing a certain part of the clientsrsquo investment in a zero coupon bond A

zero coupon bond is a bond which does not pay interest during the life of the bond but instead it can be

bought at a deep discount from its face value This is the amount that a bond will be worth when it matures

When the bond matures the investor will receive an amount equal to the initial investment plus the imputed

interest

15 | P a g e

The value of the zero coupon bond (component) depends on the guarantee level agreed upon the duration of

the IGC the term structure of interest rates and the credit spread The guaranteed level at maturity is assumed

to be 100 in this research thus the entire investment of the client forms the amount that needs to be

discounted towards the initial date This amount is subsequently discounted by a term structure of risk free

interest rates plus the credit spread corresponding to the issuer of the structured product The term structure

of the risk free interest rates incorporates the relation between time-to-maturity and the corresponding spot

rates of the specific zero coupon bond After discounting the amount of this component is known at the initial

date

The component Provision

Provision is formed by the clientsrsquo costs including administration costs management costs pricing costs and

risk premium costs The costs are charged upfront and annually (lsquotrailer feersquo) These provisions have changed

during the history of the IGC and may continue to do so in the future Overall the upfront provision is twice as

much as the annual charged provision To value the total initial provision the annual provisions need to be

discounted using the same discounting technique as previous described for the zero coupon bond When

calculated this initial value the upfront provision is added generating the total discounted value of provision as

shown in figure 8

The component Call Option

Next the valuation of the call option needs to be considered The valuation models used by lsquoVan Lanschot

Bankiersrsquo are chosen indirectly by the bank since the valuation of options is executed by lsquoKempenampCorsquo a

daughter Bank of lsquoVan Lanschot Bankiersrsquo When they have valued the specific option this value is

subsequently used by lsquoVan Lanschot Bankiersrsquo in the valuation of a specific structured product which will be

the specific IGC in this case The valuation technique used by lsquoKempenampCorsquo concerns the lsquoLocal volatility stock

behaviour modelrsquo which is one of the extensions of the classic Black- Scholes- Merton (BSM) model which

incorporates the volatility smile The extension mainly lies in the implied volatility been given a term structure

instead of just a single assumed constant figure as is the case with the BSM model By relaxing this assumption

the option price should embrace a more practical value thereby creating a more practical value for the IGC For

the specification of the option valuation technique one is referred to the internal research conducted by Pawel

Zareba15 In the remaining of the thesis the option values used to co- value the IGC are all provided by

lsquoKempenampCorsquo using stated valuation technique Here an at-the-money European call- option is considered with

a time to maturity of 5 years including a 24 months asianing

15 Pawel M Zareba (2010) Local Volatility Model paper for internal use only KempenampCo

16 | P a g e

An important characteristic the Participation Percentage

As superficially explained earlier the participation percentage indicates to which extend the holder of the

structured product participates in the value mutation of the underlying Furthermore the participation

percentage can be under equal to or above hundred percent As indicated by this paragraph the discounted

values of the components lsquoprovisionrsquo and lsquozero coupon bondrsquo are calculated first in order to calculate the

remaining which is invested in the call option Next the remaining for the call option is divided by the price of

the option calculated as former explained This gives the participation percentage at the initial date When an

IGC is created and offered towards clients which is before the initial date lsquovan Lanschot Bankiersrsquo indicates a

certain participation percentage and a certain minimum is given At the initial date the participation percentage

is set permanently

17 Chapter Conclusion

Current chapter introduced the structured product known as the lsquoIndex Guarantee Contract (IGC)rsquo a product

issued and fabricated by lsquoVan Lanschot Bankiersrsquo First the structured product in general was explained in order

to clarify characteristics and properties of this product This is because both are important to understand in

order to understand the upcoming chapters which will go more in depth

Next the structured product was put in time perspective to select characteristics for the IGC to be researched

Finally the components of the IGC were explained where to next the valuation of each was treated Simply

adding these component- values gives the value of the IGC Also these valuations were explained in order to

clarify material which will be treated in later chapters Next the term lsquoadded valuersquo from the main research

question will be clarified and the values to express this term will be dealt with

17 | P a g e

2 Expressing lsquoadded valuersquo

21 General

As the main research question states the added value of the structured product as a portfolio needs to be

examined The structured product and its specifications were dealt with in the former chapter Next the

important part of the research question regarding the added value needs to be clarified in order to conduct

the necessary calculations in upcoming chapters One simple solution would be using the expected return of

the IGC and comparing it to a certain benchmark But then another important property of a financial

instrument would be passed namely the incurred lsquoriskrsquo to enable this measured expected return Thus a

combination figure should be chosen that incorporates the expected return as well as risk The expected

return as explained in first chapter will be measured conform the arithmetic calculation So this enables a

generic calculation trough out this entire research But the second property lsquoriskrsquo is very hard to measure with

just a single method since clients can have very different risk indications Some of these were already

mentioned in the former chapter

A first solution to these enacted requirements is to calculate probabilities that certain targets are met or even

are failed by the specific instrument When using this technique it will offer a rather simplistic explanation

towards the client when interested in the matter Furthermore expected return and risk will indirectly be

incorporated Subsequently it is very important though that graphics conform figure 6 and 7 are included in

order to really understand what is being calculated by the mentioned probabilities When for example the IGC

is benchmarked by an investment in the underlying index the following graphic should be included

Figure 8 An example of the result when figure 6 and 7 are combined using an example from historical data where this somewhat can be seen as an overall example regarding the instruments chosen as such The red line represents the IGC the green line the Index- investment

Source httpwwwyoutubecom and homemade

In this graphic- example different probability calculations can be conducted to give a possible answer to the

specific client what and if there is an added value of the IGC with respect to the Index investment But there are

many probabilities possible to be calculated With other words to specify to the specific client with its own risk

indication one- or probably several probabilities need to be calculated whereas the question rises how

18 | P a g e

subsequently these multiple probabilities should be consorted with Furthermore several figures will make it

possibly difficult to compare financial instruments since multiple figures need to be compared

Therefore it is of the essence that a single figure can be presented that on itself gives the opportunity to

compare financial instruments correctly and easily A figure that enables such concerns a lsquoratiorsquo But still clients

will have different risk indications meaning several ratios need to be included When knowing the risk

indication of the client the appropriate ratio can be addressed and so the added value can be determined by

looking at the mere value of IGCrsquos ratio opposed to the ratio of the specific benchmark Thus this mere value is

interpreted in this research as being the possible added value of the IGC In the upcoming paragraphs several

ratios shall be explained which will be used in chapters afterwards One of these ratios uses statistical

measures which summarize the shape of return distributions as mentioned in paragraph 15 Therefore and

due to last chapter preliminary explanation forms a requisite

The first statistical measure concerns lsquoskewnessrsquo Skewness is a measure of the asymmetry which takes on

values that are negative positive or even zero (in case of symmetry) A negative skew indicates that the tail on

the left side of the return distribution is longer than the right side and that the bulk of the values lie to the right

of the expected value (average) For a positive skew this is the other way around The formula for skewness

reads as follows

(2)

Regarding the shapes of the return distributions stated in figure 8 one would expect that the IGC researched

on will have positive skewness Furthermore calculations regarding this research thus should show the

differences in skewness when comparing stock- index investments and investments in the IGC This will be

treated extensively later on

The second statistical measurement concerns lsquokurtosisrsquo Kurtosis is a measure of the steepness of the return

distribution thereby often also telling something about the fatness of the tails The higher the kurtosis the

higher the steepness and often the smaller the tails For a lower kurtosis this is the other way around The

formula for kurtosis reads as stated on the next page

19 | P a g e

(3) Regarding the shapes of the return distributions stated earlier one would expect that the IGC researched on

will have a higher kurtosis than the stock- index investment Furthermore calculations regarding this research

thus should show the differences in kurtosis when comparing stock- index investments and investments in the

IGC As is the case with skewness kurtosis will be treated extensively later on

The third and last statistical measurement concerns the standard deviation as treated in former chapter When

looking at the return distributions of both financial instruments in figure 8 though a significant characteristic

regarding the IGC can be noticed which diminishes the explanatory power of the standard deviation This

characteristic concerns the asymmetry of the return distribution regarding the IGC holding that the deviation

from the expected value (average) on the left hand side is not equal to the deviation on the right hand side

This means that when standard deviation is taken as the indicator for risk the risk measured could be

misleading This will be dealt with in subsequent paragraphs

22 The (regular) Sharpe Ratio

The first and most frequently used performance- ratio in the world of finance is the lsquoSharpe Ratiorsquo16 The

Sharpe Ratio also often referred to as ldquoReward to Variabilityrdquo divides the excess return of a financial

instrument over a risk-free interest rate by the instrumentsrsquo volatility

(4)

As (most) investors prefer high returns and low volatility17 the alternative with the highest Sharpe Ratio should

be chosen when assessing investment possibilities18 Due to its simplicity and its easy interpretability the

16 Wiliam FSharpe(1966) The sharpe Ratio the best of the journal of finance page 169-215 17 Adrian Blundell-Wignall (2007) An Overview of Hedge Funds and Structured products Issues in Leverage and Risk ISSN 0378-651X 18 RC Scott PAHorvath (1980) On The Directionof Preference for Moments of Higher Order Than The variance The journal of finance vol XXXV no4

20 | P a g e

Sharpe Ratio has become one of the most widely used risk-adjusted performance measures19 Yet there is a

major shortcoming of the Sharpe Ratio which needs to be considered when employing it The Sharpe Ratio

assumes a normal distribution (bell- shaped curve figure 6) regarding the annual returns by using the standard

deviation as the indicator for risk As indicated by former paragraph the standard deviation in this case can be

regarded as misleading since the deviation from the average value on both sides is unequal To show it could

be misleading to use this ratio is one of the reasons that his lsquograndfatherrsquo of all upcoming ratios is included in

this research The second and main reason is that this ratio needs to be calculated in order to calculate the

ratio which will be treated next

23 The Adjusted Sharpe Ratio

This performance- ratio belongs to the group of measures in which the properties lsquoskewnessrsquo and lsquokurtosisrsquo as

treated earlier in current chapter are explicitly included Its creators Pezier and White20 were motivated by the

drawbacks of the Sharpe Ratio especially those caused by the assumption of normally distributed returns and

therefore suggested an Adjusted Sharpe Ratio to overcome this deficiency This figures the reason why the

Sharpe Ratio is taken as the starting point and is adjusted for the shape of the return distribution by including

skewness and kurtosis

(5)

The formula and the specific figures incorporated by the formula are partially derived from a Taylor series

expansion of expected utility with an exponential utility function Without going in too much detail in

mathematics a Taylor series expansion is a representation of a function as an infinite sum of terms that are

calculated from the values of the functions derivatives at a single point The lsquominus 3rsquo in the formula is a

correction to make the kurtosis of a normal distribution equal to zero This can also be done for the skewness

whereas one could read lsquominus zerorsquo in the formula in order to make the skewness of a normal distribution

equal to zero With other words if the return distribution in fact would be normally distributed the Adjusted

Sharpe ratio would be equal to the regular Sharpe Ratio Substantially what the ratio does is incorporating a

penalty factor for negative skewness since this often means there is a large tail on the left hand side of the

expected return which can take on negative returns Furthermore a penalty factor is incorporated regarding

19 L R GoacutemeP Berrone MFranco Santos (2005) Compensation and Organisational Performance theory research and practice ISBN 978-0-7656-2251-8 20 JPeacutezier AWhite (2006) The Relative Merits of Investable Hedge Fund Indices and of Funds of Hedge Funds in Optimal Passive Portfolios ICMA Centre Discussion Papers in Finance DP 2006-10

21 | P a g e

excess kurtosis meaning the return distribution is lsquoflatterrsquo and thereby has larger tails on both ends of the

expected return Again here the left hand tail can possibly take on negative returns

24 The Sortino Ratio

This ratio is based on lower partial moments meaning risk is measured by considering only the deviations that

fall below a certain threshold This threshold also known as the target return can either be the risk free rate or

any other chosen return In this research the target return will be the risk free interest rate

(6)

One of the major advantages of this risk measurement is that no parametric assumptions like the formula of

the Adjusted Sharpe Ratio need to be stated and that there are no constraints on the form of underlying

distribution21 On the contrary the risk measurement is subject to criticism in the sense of sample returns

deviating from the target return may be too small or even empty Indeed when the target return would be set

equal to nil and since the assumption of no default and 100 guarantee is being made no return would fall

below the target return hence no risk could be measured Figure 7 clearly shows this by showing there is no

white ball left of the bar This notification underpins the assumption to set the risk free rate as the target

return Knowing the downward- risk measurement enables calculating the Sortino Ratio22

(7)

The Sortino Ratio is defined by the excess return over a minimum threshold here the risk free interest rate

divided by the downside risk as stated on the former page The ratio can be regarded as a modification of the

Sharpe Ratio as it replaces the standard deviation by downside risk Compared to the Omega Sharpe Ratio

21

C Keating WFShadwick (2002) A Universal Performance Measure The Finance Development Centre Jan2002 22

FASortino Rvan der Meer (1991) Sortino Ratio The Journal of Portfolio Management 17(4) 27-31

22 | P a g e

which will be treated hereafter negative deviations from the expected return are weighted more strongly due

to the second order of the lower partial moments (formula 6) This therefore expresses a higher risk aversion

level of the investor23

25 The Omega Sharpe Ratio

Another ratio that also uses lower partial moments concerns the Omega Sharpe Ratio24 Besides the difference

with the Sortino Ratio mentioned in former paragraph this ratio also looks at upside potential rather than

solely at lower partial moments like downside risk Therefore first downside- and upside potential need to be

stated

(8) (9)

Since both potential movements with as reference point the target risk free interest rate are included in the

ratio more is indicated about the total form of the return distribution as shown in figure 8 This forms the third

difference with respect to the Sortino Ratio which clarifies why both ratios are included while they are used in

this research for the same risk indication More on this risk indication and the linkage with the ratios elected

will be treated in paragraph 28 Now dividing the upside potential by the downside potential enables

calculating the Omega Ratio

(10)

Simply subtracting lsquoonersquo from this ratio generates the Omega Sharpe Ratio

23 Poddig Dichtl amp Petersmeier (2003) Understanding the Effect of Risk aversion p 135 24

C Keating WFShadwick (2002) A Universal Performance Measure The Finance Development Centre Jan2002

23 | P a g e

26 The Modified Sharpe Ratio

The following two ratios concern another category of ratios whereas these are based on a specific α of the

worst case scenarios The first ratio concerns the Modified Sharpe Ratio which is based on the modified value

at risk (MVaR) The in finance widely used regular value at risk (VaR) can be defined as a threshold value such

that the probability of loss on the portfolio over the given time horizon exceeds this value given a certain

probability level (lsquoαrsquo) The lsquoαrsquo chosen in this research is set equal to 10 since it is widely used25 One of the

main assumptions subject to the VaR is that the return distribution is normally distributed As discussed

previously this is not the case regarding the IGC through what makes the regular VaR misleading in this case

Therefore the MVaR is incorporated which as the regular VaR results in a certain threshold value but is

modified to the actual return distribution Therefore this calculation can be regarded as resulting in a more

accurate threshold value As the actual returns distribution is being used the threshold value can be found by

using a percentile calculation In statistics a percentile is the value of a variable below which a certain percent

of the observations fall In case of the assumed lsquoαrsquo this concerns the value below which 10 of the

observations fall A percentile holds multiple definitions whereas the one used by Microsoft Excel the software

used in this research concerns the following

(11)

When calculated the percentile of interest equally the MVaR is being calculated Next to calculate the

Modified Sharpe Ratio the lsquoMVaR Ratiorsquo needs to be calculated Simultaneously in order for the Modified

Sharpe Ratio to have similar interpretability as the former mentioned ratios namely the higher the better the

MVaR Ratio is adjusted since a higher (positive) MVaR indicates lower risk The formulas will clarify the matter

(12)

25

wwwInvestopediacom

24 | P a g e

When calculating the Modified Sharpe Ratio it is important to mention that though a non- normal return

distribution is accounted for it is based only on a threshold value which just gives a certain boundary This is

not what the client can expect in the α worst case scenarios This will be returned to in the next paragraph

27 The Modified GUISE Ratio

This forms the second ratio based on a specific α of the worst case scenarios Whereas the former ratio was

based on the MVaR which results in a certain threshold value the current ratio is based on the GUISE GUISE

stands for the Dutch definition lsquoGemiddelde Uitbetaling In Slechte Eventualiteitenrsquo which literally means

lsquoAverage Payment In The Worst Case Scenariosrsquo Again the lsquoαrsquo is assumed to be 10 The regular GUISE does

not result in a certain threshold value whereas it does result in an amount the client can expect in the 10

worst case scenarios Therefore it could be told that the regular GUISE offers more significance towards the

client than does the regular VaR26 On the contrary the regular GUISE assumes a normal return distribution

where it is repeatedly told that this is not the case regarding the IGC Therefore the modified GUISE is being

used This GUISE adjusts to the actual return distribution by taking the average of the 10 worst case

scenarios thereby taking into account the shape of the left tail of the return distribution To explain this matter

and to simultaneously visualise the difference with the former mentioned MVaR the following figure can offer

clarification

Figure 9 Visualizing an example of the difference between the modified VaR and the modified GUISE both regarding the 10 worst case scenarios

Source homemade

As can be seen in the example above both risk indicators for the Index and the IGC can lead to mutually

different risk indications which subsequently can lead to different conclusions about added value based on the

Modified Sharpe Ratio and the Modified GUISE Ratio To further clarify this the formula of the Modified GUISE

Ratio needs to be presented

26

YYamai TYoshiba (2002) Comparative Analyses of Expected Shortfall and Value at Risk Their Estimation Error

Decomposition and Composition Journal Monetary and Economic Studies Bank of Japan page 87- 121

25 | P a g e

(13)

As can be seen the only difference with the Modified Sharpe Ratio concerns the denominator in the second (ii)

formula This finding and the possible mutual risk indication- differences stated above can indeed lead to

different conclusions about the added value of the IGC If so this will need to be dealt with in the next two

chapters

28 Ratios vs Risk Indications

As mentioned few times earlier clients can have multiple risk indications In this research four main risk

indications are distinguished whereas other risk indications are not excluded from existence by this research It

simply is an assumption being made to serve restriction and thereby to enable further specification These risk

indications distinguished amongst concern risk being interpreted as

1 lsquoFailure to achieve the expected returnrsquo

2 lsquoEarning a return which yields less than the risk free interest ratersquo

3 lsquoNot earning a positive returnrsquo

4 lsquoThe return earned in the 10 worst case scenariosrsquo

Each of these risk indications can be linked to the ratios described earlier where each different risk indication

(read client) can be addressed an added value of the IGC based on another ratio This is because each ratio of

concern in this case best suits the part of the return distribution focused on by the risk indication (client) This

will be explained per ratio next

1lsquoFailure to achieve the expected returnrsquo

When the client interprets this as being risk the following part of the return distribution of the IGC is focused

on

26 | P a g e

Figure 10 Explanation of the areas researched on according to the risk indication that risk is the failure to achieve the expected return Also the characteristics of the Adjusted Sharpe Ratio are added to show the appropriateness

Source homemade

As can be seen in the figure above the Adjusted Sharpe Ratio here forms the most appropriate ratio to

measure the return per unit risk since risk is indicated by the ratio as being the deviation from the expected

return adjusted for skewness and kurtosis This holds the same indication as the clientsrsquo in this case

2lsquoEarning a return which yields less than the risk free ratersquo

When the client interprets this as being risk the part of the return distribution of the IGC focused on holds the

following

Figure 11 Explanation of the areas researched on according to the risk indication that risk is earning a return which yields less than the risk free interest rate Also the characteristics of the Sortino- and the Omega Sharpe Ratio are added to show the appropriateness of both ratios

Source homemade

27 | P a g e

These ratios are chosen most appropriate for the risk indication mentioned since both ratios indicate risk as

either being the downward deviation- or the total deviation from the risk free interest rate adjusted for the

shape (ie non-normality) Again this holds the same indication as the clientsrsquo in this case


This interpretation of risk refers to the following part of the return distribution focused on

Figure 12 Explanation of the areas researched on according to the risk indication that risk means not earning a positive return Also the characteristics of the Sortino- and the Omega Sharpe Ratio are added to show the short- falls of both ratios in this research

Source homemade

The above figure shows that when holding to the assumption of no default and when a 100 guarantee level is

used both ratios fail to measure the return per unit risk This is due to the fact that risk will be measured by

both ratios to be absent This is because none of the lsquowhite ballsrsquo fall left of the vertical bar meaning no

negative return will be realized hence no risk in this case Although the Omega Sharpe Ratio does also measure

upside potential it is subsequently divided by the absent downward potential (formula 10) resulting in an

absent figure as well With other words the assumption made in this research of holding no default and a 100

guarantee level make it impossible in this context to incorporate the specific risk indication Therefore it will

not be used hereafter regarding this research When not using the assumption and or a lower guarantee level

both ratios could turn out to be helpful

4lsquoThe return earned in the 10 worst case scenariosrsquo

The latter included interpretation of risk refers to the following part of the return distribution focused on

Before moving to the figure it needs to be repeated that the amplitude of 10 is chosen due its property of

being widely used Of course this can be deviated from in practise

28 | P a g e

Figure 13 Explanation of the areas researched on according to the risk indication that risk is the return earned in the 10 worst case scenarios Also the characteristics of the Modified Sharpe- and the Modified GUISE Ratios are added to show the appropriateness of both ratios

Source homemade

These ratios are chosen the most appropriate for the risk indication mentioned since both ratios indicate risk

as the return earned in the 10 worst case scenarios either as the expected value or as a threshold value

When both ratios contradict the possible explanation is given by the former paragraph


Current chapter introduced possible values that can be used to determine the possible added value of the IGC

as a portfolio in the upcoming chapters First it is possible to solely present probabilities that certain targets

are met or even are failed by the specific instrument This has the advantage of relative easy explanation

(towards the client) but has the disadvantage of using it as an instrument for comparison The reason is that

specific probabilities desired by the client need to be compared whereas for each client it remains the

question how these probabilities are subsequently consorted with Therefore a certain ratio is desired which

although harder to explain to the client states a single figure which therefore can be compared easier This

ratio than represents the annual earned return per unit risk This annual return will be calculated arithmetically

trough out the entire research whereas risk is classified by four categories Each category has a certain ratio

which relatively best measures risk as indicated by the category (read client) Due to the relatively tougher

explanation of each ratio an attempt towards explanation is made in current chapter by showing the return

distribution from the first chapter and visualizing where the focus of the specific risk indication is located Next

the appropriate ratio is linked to this specific focus and is substantiated for its appropriateness Important to

mention is that the figures used in current chapter only concern examples of the return- distribution of the

IGC which just gives an indication of the return- distributions of interest The precise return distributions will

show up in the upcoming chapters where a historical- and a scenario analysis will be brought forth Each of

these chapters shall than attempt to answer the main research question by using the ratios treated in current

chapter

29 | P a g e

3 Historical Analysis

31 General

The first analysis which will try to answer the main research question concerns a historical one Here the IGC of

concern (page 10) will be researched whereas this specific version of the IGC has been issued 29 times in

history of the IGC in general Although not offering a large sample size it is one of the most issued versions in

history of the IGC Therefore additionally conducting scenario analyses in the upcoming chapters should all

together give a significant answer to the main research question Furthermore this historical analysis shall be

used to show the influence of certain features on the added value of the IGC with respect to certain

benchmarks Which benchmarks and features shall be treated in subsequent paragraphs As indicated by

former chapter the added value shall be based on multiple ratios Last the findings of this historical analysis

generate a conclusion which shall be given at the end of this chapter and which will underpin the main

conclusion

32 The performance of the IGC

Former chapters showed figure- examples of how the return distributions of the specific IGC and the Index

investment could look like Since this chapter is based on historical data concerning the research period

September 2001 till February 2010 an actual annual return distribution of the IGC can be presented

Figure 14 Overview of the historical annual returns of the IGC researched on concerning the research period September 2001 till February 2010

Source Database Private Investments lsquoVan Lanschot Bankiersrsquo

The start of the research period concerns the initial issue date of the IGC researched on When looking at the

figure above and the figure examples mentioned before it shows little resemblance One property of the

distributions which does resemble though is the highest frequency being located at the upper left bound

which claims the given guarantee of 100 The remaining showing little similarity does not mean the return

distribution explained in former chapters is incorrect On the contrary in the former examples many white

balls were thrown in the machine whereas it can be translated to the current chapter as throwing in solely 29

balls (IGCrsquos) With other words the significance of this conducted analysis needs to be questioned Moreover it

is important to mention once more that the chosen IGC is one the most frequently issued ones in history of the

30 | P a g e

IGC Thus specifying this research which requires specifying the IGC makes it hard to deliver a significant

historical analysis Therefore a scenario analysis is added in upcoming chapters As mentioned in first paragraph

though the historical analysis can be used to show how certain features have influence on the added value of

the IGC with respect to certain benchmarks This will be treated in the second last paragraph where it is of the

essence to first mention the benchmarks used in this historical research

33 The Benchmarks

In order to determine the added value of the specific IGC it needs to be determined what the mere value of

the IGC is based on the mentioned ratios and compared to a certain benchmark In historical context six

fictitious portfolios are elected as benchmark Here the weight invested in each financial instrument is based

on the weight invested in the share component of real life standard portfolios27 at research date (03-11-2010)

The financial instruments chosen for the fictitious portfolios concern a tracker on the EuroStoxx50 and a

tracker on the Euro bond index28 A tracker is a collective investment scheme that aims to replicate the

movements of an index of a specific financial market regardless the market conditions These trackers are

chosen since provisions charged are already incorporated in these indices resulting in a more accurate

benchmark since IGCrsquos have provisions incorporated as well Next the fictitious portfolios can be presented

Figure 15 Overview of the fictitious portfolios which serve as benchmark in the historical analysis The weights are based on the investment weights indicated by the lsquoStandard Portfolio Toolrsquo used by lsquoVan Lanschot Bankiersrsquo at research date 03-11-2010

Source weights lsquostandard portfolio tool customer management at Van Lanschot Bankiersrsquo

Next to these fictitious portfolios an additional one introduced concerns a 100 investment in the

EuroStoxx50 Tracker On the one hand this is stated to intensively show the influences of some features which

will be treated hereafter On the other hand it is a benchmark which shall be used in the scenario analysis as

well thereby enabling the opportunity to generally judge this benchmark with respect to the IGC chosen

To stay in line with former paragraph the resemblance of the actual historical data and the figure- examples

mentioned in the former paragraph is questioned Appendix 1 shows the annual return distributions of the

above mentioned portfolios Before looking at the resemblance it is noticeable that generally speaking the

more risk averse portfolios performed better than the more risk bearing portfolios This can be accounted for

by presenting the performances of both trackers during the research period

27

Standard Portfolios obtained by using the Standard Portfolio tool (customer management) at lsquoVan Lanschotrsquo 28

EFFAS Euro Bond Index Tracker 3-5 years

31 | P a g e

Figure 16 Performance of both trackers during the research period 01-09-lsquo01- 01-02-rsquo10 Both are used in the fictitious portfolios

Source Bloomberg

As can be seen above the bond index tracker has performed relatively well compared to the EuroStoxx50-

tracker during research period thereby explaining the notification mentioned When moving on to the

resemblance appendix 1 slightly shows bell curved normal distributions Like former paragraph the size of the

returns measured for each portfolio is equal to 29 Again this can explain the poor resemblance and questions

the significance of the research whereas it merely serves as a means to show the influence of certain features

on the added value of the IGC Meanwhile it should also be mentioned that the outcome of the machine (figure

6 page 11) is not perfectly bell shaped whereas it slightly shows deviation indicating a light skewness This will

be returned to in the scenario analysis since there the size of the analysis indicates significance

34 The Influence of Important Features

Two important features are incorporated which to a certain extent have influence on the added value of the

IGC

1 Dividend

2 Provision

1 Dividend

The EuroStoxx50 Tracker pays dividend to its holders whereas the IGC does not Therefore dividend ceteris

paribus should induce the return earned by the holder of the Tracker compared to the IGCrsquos one The extent to

which dividend has influence on the added value of the IGC shall be different based on the incorporated ratios

since these calculate return equally but the related risk differently The reason this feature is mentioned

separately is that this can show the relative importance of dividend

2 Provision

Both the IGC and the Trackers involved incorporate provision to a certain extent This charged provision by lsquoVan

Lanschot Bankiersrsquo can influence the added value of the IGC since another percentage is left for the call option-

32 | P a g e

component (as explained in the first chapter) Therefore it is interesting to see if the IGC has added value in

historical context when no provision is being charged With other words when setting provision equal to nil

still does not lead to an added value of the IGC no provision issue needs to be launched regarding this specific

IGC On the contrary when it does lead to a certain added value it remains the question which provision the

bank needs to charge in order for the IGC to remain its added value This can best be determined by the

scenario analysis due to its larger sample size

In order to show the effect of both features on the added value of the IGC with respect to the mentioned

benchmarks each feature is set equal to its historical true value or to nil This results in four possible

combinations where for each one the mentioned ratios are calculated trough what the added value can be

determined An overview of the measured ratios for each combination can be found in the appendix 2a-2d

From this overview first it can be concluded that when looking at appendix 2c setting provision to nil does

create an added value of the IGC with respect to some or all the benchmark portfolios This depends on the

ratio chosen to determine this added value It is noteworthy that the regular Sharpe Ratio and the Adjusted

Sharpe Ratio never show added value of the IGC even when provisions is set to nil Especially the Adjusted

Sharpe Ratio should be highlighted since this ratio does not assume a normal distribution whereas the Regular

Sharpe Ratio does The scenario analysis conducted hereafter should also evaluate this ratio to possibly confirm

this noteworthiness

Second the more risk averse portfolios outperformed the specific IGC according to most ratios even when the

IGCrsquos provision is set to nil As shown in former paragraph the European bond tracker outperformed when

compared to the European index tracker This can explain the second conclusion since the additional payout of

the IGC is largely generated by the performance of the underlying as shown by figure 8 page 14 On the

contrary the risk averse portfolios are affected slightly by the weak performing Euro index tracker since they

invest a relative small percentage in this instrument (figure 15 page 39)

Third dividend does play an essential role in determining the added value of the specific IGC as when

excluding dividend does make the IGC outperform more benchmark portfolios This counts for several of the

incorporated ratios Still excluding dividend does not create the IGC being superior regarding all ratios even

when provision is set to nil This makes dividend subordinate to the explanation of the former conclusion

Furthermore it should be mentioned that dividend and this former explanation regarding the Index Tracker are

related since both tend to be negatively correlated29

Therefore the dividends paid during the historical

research period should be regarded as being relatively high due to the poor performance of the mentioned

Index Tracker

29 K Bhanot SAMansi JK Wald (2008) Takeover risk and the correlation between stocks and bonds Journal of Emperical

Finance Volume 17 Issue 3 June 2010 pages 381-393

33 | P a g e


Current chapter historically researched the IGC of interest Although it is one of the most issued versions of the

IGC in history it only counts for a sample size of 29 This made the analysis insignificant to a certain level which

makes the scenario analysis performed in subsequent chapters indispensable Although there is low

significance the influence of dividend and provision on the added value of the specific IGC can be shown

historically First it had to be determined which benchmarks to use where five fictitious portfolios holding a

Euro bond- and a Euro index tracker and a full investment in a Euro index tracker were elected The outcome

can be seen in the appendix (2a-2d) where each possible scenario concerns including or excluding dividend

and or provision Furthermore it is elaborated for each ratio since these form the base values for determining

added value From this outcome it can be concluded that setting provision to nil does create an added value of

the specific IGC compared to the stated benchmarks although not the case for every ratio Here the Adjusted

Sharpe Ratio forms the exception which therefore is given additional attention in the upcoming scenario

analyses The second conclusion is that the more risk averse portfolios outperformed the IGC even when

provision was set to nil This is explained by the relatively strong performance of the Euro bond tracker during

the historical research period The last conclusion from the output regarded the dividend playing an essential

role in determining the added value of the specific IGC as it made the IGC outperform more benchmark

portfolios Although the essential role of dividend in explaining the added value of the IGC it is subordinated to

the performance of the underlying index (tracker) which it is correlated with

Current chapter shows the scenario analyses coming next are indispensable and that provision which can be

determined by the bank itself forms an issue to be launched

34 | P a g e

4 Scenario Analysis

41 General

As former chapter indicated low significance current chapter shall conduct an analysis which shall require high

significance in order to give an appropriate answer to the main research question Since in historical

perspective not enough IGCrsquos of the same kind can be researched another analysis needs to be performed

namely a scenario analysis A scenario analysis is one focused on future data whereas the initial (issue) date

concerns a current moment using actual input- data These future data can be obtained by multiple scenario

techniques whereas the one chosen in this research concerns one created by lsquoOrtec Financersquo lsquoOrtec Financersquo is

a global provider of technology and advisory services for risk- and return management Their global and

longstanding client base ranges from pension funds insurers and asset managers to municipalities housing

corporations and financial planners30 The reason their scenario analysis is chosen is that lsquoVan Lanschot

Bankiersrsquo wants to use it in order to consult a client better in way of informing on prospects of the specific

financial instrument The outcome of the analysis is than presented by the private banker during his or her

consultation Though the result is relatively neat and easy to explain to clients it lacks the opportunity to fast

and easily compare the specific financial instrument to others Since in this research it is of the essence that

financial instruments are being compared and therefore to define added value one of the topics treated in

upcoming chapter concerns a homemade supplementing (Excel-) model After mentioning both models which

form the base of the scenario analysis conducted the results are being examined and explained To cancel out

coincidence an analysis using multiple issue dates is regarded next Finally a chapter conclusion shall be given

42 Base of Scenario Analysis

The base of the scenario analysis is formed by the model conducted by lsquoOrtec Financersquo Mainly the model

knows three phases important for the user

The input

The scenario- process

The output

Each phase shall be explored in order to clarify the model and some important elements simultaneously

The input

Appendix 3a shows the translated version of the input field where initial data can be filled in Here lsquoBloombergrsquo

serves as data- source where some data which need further clarification shall be highlighted The first

percentage highlighted concerns the lsquoparticipation percentagersquo as this does not simply concern a given value

but a calculation which also uses some of the other filled in data as explained in first chapter One of these data

concerns the risk free interest rate where a 3-5 years European government bond is assumed as such This way

30

wwwOrtec-financecom

35 | P a g e

the same duration as the IGC researched on can be realized where at the same time a peer geographical region

is chosen both to conduct proper excess returns Next the zero coupon percentage is assumed equal to the

risk free interest rate mentioned above Here it is important to stress that in order to calculate the participation

percentage a term structure of the indicated risk free interest rates is being used instead of just a single

percentage This was already explained on page 15 The next figure of concern regards the credit spread as

explained in first chapter As it is mentioned solely on the input field it is also incorporated in the term

structure last mentioned as it is added according to its duration to the risk free interest rate This results in the

final term structure which as a whole serves as the discount factor for the guaranteed value of the IGC at

maturity This guaranteed value therefore is incorporated in calculating the participation percentage where

furthermore it is mentioned solely on the input field Next the duration is mentioned on the input field by filling

in the initial- and the final date of the investment This duration is also taken into account when calculating the

participation percentage where it is used in the discount factor as mentioned in first chapter also

Furthermore two data are incorporated in the participation percentage which cannot be found solely on the

input field namely the option price and the upfront- and annual provision Both components of the IGC co-

determine the participation percentage as explained in first chapter The remaining data are not included in the

participation percentage whereas most of these concern assumptions being made and actual data nailed down

by lsquoBloombergrsquo Finally two fill- ins are highlighted namely the adjustments of the standard deviation and

average and the implied volatility The main reason these are not set constant is that similar assumptions are

being made in the option valuation as treated shortly on page 15 Although not using similar techniques to deal

with the variability of these characteristics the concept of the characteristics changing trough time is

proclaimed When choosing the options to adjust in the input screen all adjustable figures can be filled in

which can be seen mainly by the orange areas in appendix 3b- 3c These fill- ins are set by rsquoOrtec Financersquo and

are adjusted by them through time Therefore these figures are assumed given in this research and thus are not

changed personally This is subject to one of the main assumptions concerning this research namely that the

Ortec model forms an appropriate scenario model When filling in all necessary data one can push the lsquostartrsquo

button and the model starts generating scenarios


The filled in data is used to generate thousand scenarios which subsequently can be used to generate the neat

output Without going into much depth regarding specific calculations performed by the model roughly similar

calculations conform the first chapter are performed to generate the value of financial instruments at each

time node (month) and each scenario This generates enough data to serve the analysis being significant This

leads to the first possible significant confirmation of the return distribution as explained in the first chapter

(figure 6 and 7) since the scenario analyses use two similar financial instruments and ndashprice realizations To

explain the last the following outcomes of the return distribution regarding the scenario model are presented

first

36 | P a g e

Figure 17 Performance of both financial instruments regarding the scenario analysis whereas each return is

generated by a single scenario (out of the thousand scenarios in total)The IGC returns include the

provision of 1 upfront and 05 annually and the stock index returns include dividend

Source Ortec Model

The figures above shows general similarity when compared to figure 6 and 7 which are the outcomes of the

lsquoGalton Machinersquo When looking more specifically though the bars at the return distribution of the Index

slightly differ when compared to the (brown) reference line shown in figure 6 But figure 6 and its source31 also

show that there are slight deviations from this reference line as well where these deviations differ per

machine- run (read different Index ndashor time period) This also indicates that there will be skewness to some

extent also regarding the return distribution of the Index Thus the assumption underlying for instance the

Regular Sharpe Ratio may be rejected regarding both financial instruments Furthermore it underpins the

importance ratios are being used which take into account the shape of the return distribution in order to

prevent comparing apples and oranges Moving on to the scenario process after creating thousand final prices

(thousand white balls fallen into a specific bar) returns are being calculated by the model which are used to

generate the last phase

The output

After all scenarios are performed a neat output is presented by the Ortec Model

Figure 18 Output of the Ortec Model simultaneously giving the results of the model regarding the research date November 3

rd 2010

Source Ortec Model

31

wwwyoutubecomwatchv=9xUBhhM4vbM

37 | P a g e

The percentiles at the top of the output can be chosen as can be seen in appendix 3 As can be seen no ratios

are being calculated by the model whereas solely probabilities are displayed under lsquostatisticsrsquo Last the annual

returns are calculated arithmetically as is the case trough out this entire research As mentioned earlier ratios

form a requisite to compare easily Therefore a supplementing model needs to be introduced to generate the

ratios mentioned in the second chapter

In order to create this model the formulas stated in the second chapter need to be transformed into Excel

Subsequently this created Excel model using the scenario outcomes should automatically generate the

outcome for each ratio which than can be added to the output shown above To show how the model works

on itself an example is added which can be found on the disc located in the back of this thesis

43 Result of a Single IGC- Portfolio

The result of the supplementing model simultaneously concerns the answer to the research question regarding

research date November 3rd

2010

Figure 19 Result of the supplementing (homemade) model showing the ratio values which are

calculated automatically when the scenarios are generated by the Ortec Model A version of

the total model is included in the back of this thesis

Source Homemade

The figure above shows that when the single specific IGC forms the portfolio all ratios show a mere value when

compared to the Index investment Only the Modified Sharpe Ratio (displayed in red) shows otherwise Here

the explanation- example shown by figure 9 holds Since the modified GUISE- and the Modified VaR Ratio

contradict in this outcome a choice has to be made when serving a general conclusion Here the Modified

GUISE Ratio could be preferred due to its feature of calculating the value the client can expect in the αth

percent of the worst case scenarios where the Modified VaR Ratio just generates a certain bounded value In

38 | P a g e

this case the Modified GUISE Ratio therefore could make more sense towards the client This all leads to the

first significant general conclusion and answer to the main research question namely that the added value of

structured products as a portfolio holds the single IGC chosen gives a client despite his risk indication the

opportunity to generate more return per unit risk in five years compared to an investment in the underlying

index as a portfolio based on the Ortec- and the homemade ratio- model

Although a conclusion is given it solely holds a relative conclusion in the sense it only compares two financial

instruments and shows onesrsquo mere value based on ratios With other words one can outperform the other

based on the mentioned ratios but it can still hold low ratio value in general sense Therefore added value

should next to relative added value be expressed in an absolute added value to show substantiality

To determine this absolute benchmark and remain in the area of conducted research the performance of the

IGC portfolio is compared to the neutral fictitious portfolio and the portfolio fully investing in the index-

tracker both used in the historical analysis Comparing the ratios in this context should only be regarded to

show a general ratio figure Because the comparison concerns different research periods and ndashunderlyings it

should furthermore be regarded as comparing apples and oranges hence the data serves no further usage in

this research In order to determine the absolute added value which underpins substantiality the comparing

ratios need to be presented

Figure 20 An absolute comparison of the ratios concerning the IGC researched on and itsrsquo Benchmark with two

general benchmarks in order to show substantiality Last two ratios are scaled (x100) for clarity

Source Homemade

As can be seen each ratio regarding the IGC portfolio needs to be interpreted by oneself since some

underperform and others outperform Whereas the regular sharpe ratio underperforms relatively heavily and

39 | P a g e

the adjusted sharpe ratio underperforms relatively slight the sortino ratio and the omega sharpe ratio

outperform relatively heavy The latter can be concluded when looking at the performance of the index

portfolio in scenario context and comparing it with the two historical benchmarks The modified sharpe- and

the modified GUISE ratio differ relatively slight where one should consider the performed upgrading Excluding

the regular sharpe ratio due to its misleading assumption of normal return distribution leaves the general

conclusion that the calculated ratios show substantiality Trough out the remaining of this research the figures

of these two general (absolute) benchmarks are used solely to show substantiality

44 Significant Result of a Single IGC- Portfolio

Former paragraph concluded relative added value of the specific IGC compared to an investment in the

underlying Index where both are considered as a portfolio According to the Ortec- and the supplemental

model this would be the case regarding initial date November 3rd 2010 Although the amount of data indicates

significance multiple initial dates should be investigated to cancel out coincidence Therefore arbitrarily fifty

initial dates concerning last ten years are considered whereas the same characteristics of the IGC are used

Characteristics for instance the participation percentage which are time dependant of course differ due to

different market circumstances Using both the Ortec- and the supplementing model mentioned in former

paragraph enables generating the outcomes for the fifty initial dates arbitrarily chosen

Figure 21 The results of arbitrarily fifty initial dates concerning a ten year (last) period overall showing added

value of the specific IGC compared to the (underlying) Index

Source Homemade

As can be seen each ratio overall shows added value of the specific IGC compared to the (underlying) Index

The only exception to this statement 35 times out of the total 50 concerns the Modified VaR Ratio where this

again is due to the explanation shown in figure 9 Likewise the preference for the Modified GUISE Ratio is

enunciated hence the general statement holding the specific IGC has relative added value compared to the

Index investment at each initial date This signifies that overall hundred percent of the researched initial dates

indicate relative added value of the specific IGC

40 | P a g e

When logically comparing last finding with the former one regarding a single initial (research) date it can

equally be concluded that the calculated ratios (figure 21) in absolute terms are on the high side and therefore

substantial


Current chapter conducted a scenario analysis which served high significance in order to give an appropriate

answer to the main research question First regarding the base the Ortec- and its supplementing model where

presented and explained whereas the outcomes of both were presented These gave the first significant

answer to the research question holding the single IGC chosen gives a client despite his risk indication the


index as a portfolio At least that is the general outcome when bolstering the argumentation that the Modified

GUISE Ratio has stronger explanatory power towards the client than the Modified VaR Ratio and thus should

be preferred in case both contradict This general answer solely concerns two financial instruments whereas an

absolute comparison is requisite to show substantiality Comparing the fictitious neutral portfolio and the full

portfolio investment in the index tracker both conducted in former chapter results in the essential ratios

being substantial Here the absolute benchmarks are solely considered to give a general idea about the ratio

figures since the different research periods regarded make the comparison similar to comparing apples and

oranges Finally the answer to the main research question so far only concerned initial issue date November

3rd 2010 In order to cancel out a lucky bullrsquos eye arbitrarily fifty initial dates are researched all underpinning

the same answer to the main research question as November 3rd 2010

The IGC researched on shows added value in this sense where this IGC forms the entire portfolio It remains

question though what will happen if there are put several IGCrsquos in a portfolio each with different underlyings

A possible diversification effect which will be explained in subsequent chapter could lead to additional added

value

41 | P a g e

5 Scenario Analysis multiple IGC- Portfolio

51 General

Based on the scenario models former chapter showed the added value of a single IGC portfolio compared to a

portfolio consisting entirely out of a single index investment Although the IGC in general consists of multiple

components thereby offering certain risk interference additional interference may be added This concerns

incorporating several IGCrsquos into the portfolio where each IGC holds another underlying index in order to

diversify risk The possibilities to form a portfolio are immense where this chapter shall choose one specific

portfolio consisting of arbitrarily five IGCrsquos all encompassing similar characteristics where possible Again for

instance the lsquoparticipation percentagersquo forms the exception since it depends on elements which mutually differ

regarding the chosen IGCrsquos Last but not least the chosen characteristics concern the same ones as former

chapters The index investments which together form the benchmark portfolio will concern the indices

underlying the IGCrsquos researched on

After stating this portfolio question remains which percentage to invest in each IGC or index investment Here

several methods are possible whereas two methods will be explained and implemented Subsequently the

results of the obtained portfolios shall be examined and compared mutually and to former (chapter-) findings

Finally a chapter conclusion shall provide an additional answer to the main research question

52 The Diversification Effect

As mentioned above for the IGC additional risk interference may be realized by incorporating several IGCrsquos in

the portfolio To diversify the risk several underlying indices need to be chosen that are negatively- or weakly

correlated When compared to a single IGC- portfolio the multiple IGC- portfolio in case of a depreciating index

would then be compensated by another appreciating index or be partially compensated by a less depreciating

other index When translating this to the ratios researched on each ratio could than increase by this risk

diversification With other words the risk and return- trade off may be influenced favorably When this is the

case the diversification effect holds Before analyzing if this is the case the mentioned correlations need to be

considered for each possible portfolio

Figure 22 The correlation- matrices calculated using scenario data generated by the Ortec model The Ortec

model claims the thousand end- values for each IGC Index are not set at random making it

possible to compare IGCrsquos Indices values at each node

Source Ortec Model and homemade

42 | P a g e

As can be seen in both matrices most of the correlations are positive Some of these are very low though

which contributes to the possible risk diversification Furthermore when looking at the indices there is even a

negative correlation contributing to the possible diversification effect even more In short a diversification

effect may be expected

53 Optimizing Portfolios

To research if there is a diversification effect the portfolios including IGCrsquos and indices need to be formulated

As mentioned earlier the amount of IGCrsquos and indices incorporated is chosen arbitrarily Which (underlying)

index though is chosen deliberately since the ones chosen are most issued in IGC- history Furthermore all

underlyings concern a share index due to historical research (figure 4) The chosen underlyings concern the

following stock indices

The EurosStoxx50 index

The AEX index

The Nikkei225 index

The Hans Seng index

The StandardampPoorrsquos500 index

After determining the underlyings question remains which portfolio weights need to be addressed to each

financial instrument of concern In this research two methods are argued where the first one concerns

portfolio- optimization by implementing the mean variance technique The second one concerns equally

weighted portfolios hence each financial instrument is addressed 20 of the amount to be invested The first

method shall be underpinned and explained next where after results shall be interpreted

Portfolio optimization using the mean variance- technique

This method was founded by Markowitz in 195232

and formed one the pioneer works of Modern Portfolio

Theory What the method basically does is optimizing the regular Sharpe Ratio as the optimal tradeoff between

return (measured by the mean) and risk (measured by the variance) is being realized This realization is enabled

by choosing such weights for each incorporated financial instrument that the specific ratio reaches an optimal

level As mentioned several times in this research though measuring the risk of the specific structured product

by the variance33 is reckoned misleading making an optimization of the Regular Sharpe Ratio inappropriate

Therefore the technique of Markowitz shall be used to maximize the remaining ratios mentioned in this

research since these do incorporate non- normal return distributions To fast implement this technique a

lsquoSolver- functionrsquo in Excel can be used to address values to multiple unknown variables where a target value

and constraints are being stated when necessary Here the unknown variables concern the optimal weights

which need to be calculated whereas the target value concerns the ratio of interest To generate the optimal

32

GJ Alexander (2002) Economic implications of using a mean-VaR model for portfolio selection A comparison with mean-

variance analysis Journal of Economic Dynamics and Control Volume 26 Issue 7-8 pages 1159-1193 33

The square root of the variance gives the standard deviation

43 | P a g e

weights for each incorporated ratio a homemade portfolio model is created which can be found on the disc

located in the back of this thesis To explain how the model works the following figure will serve clarification

Figure 23 An illustrating example of how the Portfolio Model works in case of optimizing the (IGC-pfrsquos) Omega Sharpe Ratio

returning the optimal weights associated The entire model can be found on the disc in the back of this thesis

Source Homemade Located upper in the figure are the (at start) unknown weights regarding the five portfolios Furthermore it can

be seen that there are twelve attempts to optimize the specific ratio This has simply been done in order to

generate a frontier which can serve as a visualization of the optimal portfolio when asked for For instance

explaining portfolio optimization to the client may be eased by the figure Regarding the Omega Sharpe Ratio

the following frontier may be presented

Figure 24 An example of the (IGC-pfrsquos) frontier (in green) realized by the ratio- optimization The green dot represents

the minimum risk measured as such (here downside potential) and the red dot represents the risk free

interest rate at initial date The intercept of the two lines shows the optimal risk return tradeoff

Source Homemade

44 | P a g e

Returning to the explanation on former page under the (at start) unknown weights the thousand annual

returns provided by the Ortec model can be filled in for each of the five financial instruments This purveys the

analyses a degree of significance Under the left green arrow in figure 23 the ratios are being calculated where

the sixth portfolio in this case shows the optimal ratio This means the weights calculated by the Solver-

function at the sixth attempt indicate the optimal weights The return belonging to the optimal ratio (lsquo94582rsquo)

is calculated by taking the average of thousand portfolio returns These portfolio returns in their turn are being

calculated by taking the weight invested in the financial instrument and multiplying it with the return of the

financial instrument regarding the mentioned scenario Subsequently adding up these values for all five

financial instruments generates one of the thousand portfolio returns Finally the Solver- table in figure 23

shows the target figure (risk) the changing figures (the unknown weights) and the constraints need to be filled

in The constraints in this case regard the sum of the weights adding up to 100 whereas no negative weights

can be realized since no short (sell) positions are optional

54 Results of a multi- IGC Portfolio

The results of the portfolio models concerning both the multiple IGC- and the multiple index portfolios can be

found in the appendix 5a-b Here the ratio values are being given per portfolio It can clearly be seen that there

is a diversification effect regarding the IGC portfolios Apparently combining the five mentioned IGCrsquos during

the (future) research period serves a better risk return tradeoff despite the risk indication of the client That is

despite which risk indication chosen out of the four indications included in this research But this conclusion is

based purely on the scenario analysis provided by the Ortec model It remains question if afterwards the actual

indices performed as expected by the scenario model This of course forms a risk The reason for mentioning is

that the general disadvantage of the mean variance technique concerns it to be very sensitive to expected

returns34 which often lead to unbalanced weights Indeed when looking at the realized weights in appendix 6

this disadvantage is stated The weights of the multiple index portfolios are not shown since despite the ratio

optimized all is invested in the SampP500- index which heavily outperforms according to the Ortec model

regarding the research period When ex post the actual indices perform differently as expected by the

scenario analysis ex ante the consequences may be (very) disadvantageous for the client Therefore often in

practice more balanced portfolios are preferred35

This explains why the second method of weight determining

also is chosen in this research namely considering equally weighted portfolios When looking at appendix 5a it

can clearly be seen that even when equal weights are being chosen the diversification effect holds for the

multiple IGC portfolios An exception to this is formed by the regular Sharpe Ratio once again showing it may

be misleading to base conclusions on the assumption of normal return distribution

Finally to give answer to the main research question the added values when implementing both methods can

be presented in a clear overview This can be seen in the appendix 7a-c When looking at 7a it can clearly be

34

MJBest RJGrauer (2002) The analytics of sensitivity analysis for mean-variance portfolio problems International Review

of Financial Analysis Volume 1 Issue 1 Pages 17- 97 35 HEilat BGolany Ashtub (2005) Constructing and evaluating balanced portfolios Eropean Journal of Operational

Research Volume 172 Issue 3 Pages 1018- 1039

45 | P a g e

seen that many ratios show a mere value regarding the multiple IGC portfolio The first ratio contradicting

though concerns the lsquoRegular Sharpe Ratiorsquo again showing itsrsquo inappropriateness The two others contradicting

concern the Modified Sharpe - and the Modified GUISE Ratio where the last may seem surprising This is

because the IGC has full protection of the amount invested and the assumption of no default holds

Furthermore figure 9 helped explain why the Modified GUISE Ratio of the IGC often outperforms its peer of the

index The same figure can also explain why in this case the ratio is higher for the index portfolio Both optimal

multiple IGC- and index portfolios fully invest in the SampP500 (appendix 6) Apparently this index will perform

extremely well in the upcoming five years according to the Ortec model This makes the return- distribution of

the IGC portfolio little more right skewed whereas this is confined by the largest amount of returns pertaining

the nil return When looking at the return distribution of the index- portfolio though one can see the shape of

the distribution remains intact and simply moves to the right hand side (higher returns) Following figure

clarifies the matter

Figure 25 The return distributions of the IGC- respectively the Index portfolio both investing 100 in the SampP500 (underlying) Index The IGC distribution shows little more right skewness whereas the Index distribution shows the entire movement to the right hand side

Source Homemade The optimization of the remaining ratios which do show a mere value of the IGC portfolio compared to the

index portfolio do not invest purely in the SampP500 (underlying) index thereby creating risk diversification This

effect does not hold for the IGC portfolios since there for each ratio optimization a full investment (100) in

the SampP500 is the result This explains why these ratios do show the mere value and so the added value of the

multiple IGC portfolio which even generates a higher value as is the case of a single IGC (EuroStoxx50)-

portfolio


Current chapter showed that when incorporating several IGCrsquos into a portfolio due to the diversification effect

an even larger added value of this portfolio compared to a multiple index portfolio may be the result This

depends on the ratio chosen hence the preferred risk indication This could indicate that rather multiple IGCrsquos

should be used in a portfolio instead of just a single IGC Though one should keep in mind that the amount of

IGCrsquos incorporated is chosen deliberately and that the analysis is based on scenarios generated by the Ortec

model The last is mentioned since the analysis regarding optimization results in unbalanced investment-

weights which are hardly implemented in practice Regarding the results mainly shown in the appendix 5-7

current chapter gives rise to conducting further research regarding incorporating multiple structured products

in a portfolio

46 | P a g e

6 Practical- solutions

61 General

The research so far has performed historical- and scenario analyses all providing outcomes to help answering

the research question A recapped answer of these outcomes will be provided in the main conclusion given

after this chapter whereas current chapter shall not necessarily be contributive With other words the findings

in this chapter are not purely academic of nature but rather should be regarded as an additional practical

solution to certain issues related to the research so far In order for these findings to be practiced fully in real

life though further research concerning some upcoming features form a requisite These features are not

researched in this thesis due to research delineation One possible practical solution will be treated in current

chapter whereas a second one will be stated in the appendix 12 Hereafter a chapter conclusion shall be given

62 A Bank focused solution

This hardly academic but mainly practical solution is provided to give answer to the question which provision

a Bank can charge in order for the specific IGC to remain itsrsquo relative added value Important to mention here is

that it is not questioned in order for the Bank to charge as much provision as possible It is mere to show that

when the current provision charged does not lead to relative added value a Bank knows by how much the

provision charged needs to be adjusted to overcome this phenomenon Indeed the historical research

conducted in this thesis has shown historically a provision issue may be launched The reason a Bank in general

is chosen instead of solely lsquoVan Lanschot Bankiersrsquo is that it might be the case that another issuer of the IGC

needs to be considered due to another credit risk Credit risk

is the risk that an issuer of debt securities or a borrower may default on its obligations or that the payment

may not be made on a negotiable instrument36 This differs per Bank available and can change over time Again

for this part of research the initial date November 3rd 2010 is being considered Furthermore it needs to be

explained that different issuers read Banks can issue an IGC if necessary for creating added value for the

specific client This will be returned to later on All the above enables two variables which can be offset to

determine the added value using the Ortec model as base

Provision

Credit Risk

To implement this the added value needs to be calculated for each ratio considered In case the clientsrsquo risk

indication is determined the corresponding ratio shows the added value for each provision offset to each

credit risk This can be seen in appendix 8 When looking at these figures subdivided by ratio it can clearly be

seen when the specific IGC creates added value with respect to itsrsquo underlying Index It is of great importance

36

wwwfinancial ndash dictionarycom

47 | P a g e

to mention that these figures solely visualize the technique dedicated by this chapter This is because this

entire research assumes no default risk whereas this would be of great importance in these stated figures

When using the same technique but including the defaulted scenarios of the Ortec model at the research date

of interest would at time create proper figures To generate all these figures it currently takes approximately

170 minutes by the Ortec model The reason for mentioning is that it should be generated rapidly since it is

preferred to give full analysis on the same day the IGC is issued Subsequently the outcomes of the Ortec model

can be filled in the homemade supplementing model generating the ratios considered This approximately

takes an additional 20 minutes The total duration time of the process could be diminished when all models are

assembled leaving all computer hardware options out of the question All above leads to the possibility for the

specific Bank with a specific credit spread to change its provision to such a rate the IGC creates added value

according to the chosen ratio As can be seen by the figures in appendix 8 different banks holding different

credit spreads and ndashprovisions can offer added value So how can the Bank determine which issuer (Bank)

should be most appropriate for the specific client Rephrasing the question how can the client determine

which issuer of the specific IGC best suits A question in advance can be stated if the specific IGC even suits the

client in general Al these questions will be answered by the following amplification of the technique stated

above

As treated at the end of the first chapter the return distribution of a financial instrument may be nailed down

by a few important properties namely the Standard Deviation (volatility) the Skewness and the Kurtosis These

can be calculated for the IGC again offsetting the provision against the credit spread generating the outcomes

as presented in appendix 9 Subsequently to determine the suitability of the IGC for the client properties as

the ones measured in appendix 9 need to be stated for a specific client One of the possibilities to realize this is

to use the questionnaire initiated by Andreas Bluumlmke37 For practical means the questionnaire is being

actualized in Excel whereas it can be filled in digitally and where the mentioned properties are calculated

automatically Also a question is set prior to Bluumlmkersquos questionnaire to ascertain the clientrsquos risk indication

This all leads to the questionnaire as stated in appendix 10 The digital version is included on the disc located in

the back of this thesis The advantage of actualizing the questionnaire is that the list can be mailed to the

clients and that the properties are calculated fast and easy The drawback of the questionnaire is that it still

needs to be researched on reliability This leaves room for further research Once the properties of the client

and ndashthe Structured product are known both can be linked This can first be done by looking up the closest

property value as measured by the questionnaire The figure on next page shall clarify the matter

37

Andreas Bluumlmke (2009) ldquoHow to invest in Structured products a guide for investors and Asset Managersrsquo ISBN 978-0-470-

74679-0

48 | P a g e

Figure 26 Example where the orange arrow represents the closest value to the property value (lsquoskewnessrsquo) measured by the questionnaire Here the corresponding provision and the credit spread can be searched for

Source Homemade

The same is done for the remaining properties lsquoVolatilityrsquo and ldquoKurtosisrsquo After consultation it can first be

determined if the financial instrument in general fits the client where after a downward adjustment of

provision or another issuer should be considered in order to better fit the client Still it needs to be researched

if the provision- and the credit spread resulting from the consultation leads to added value for the specific

client Therefore first the risk indication of the client needs to be considered in order to determine the

appropriate ratio Thereafter the same output as appendix 8 can be used whereas the consulted node (orange

arrow) shows if there is added value As example the following figure is given

Figure 27 The credit spread and the provision consulted create the node (arrow) which shows added value (gt0)

Source Homemade

As former figure shows an added value is being created by the specific IGC with respect to the (underlying)

Index as the ratio of concern shows a mere value which is larger than nil

This technique in this case would result in an IGC being offered by a Bank to the specific client which suits to a

high degree and which shows relative added value Again two important features need to be taken into

49 | P a g e

account namely the underlying assumption of no default risk and the questionnaire which needs to be further

researched for reliability Therefore current technique may give rise to further research


Current chapter presented two possible practical solutions which are incorporated in this research mere to

show the possibilities of the models incorporated In order for the mentioned solutions to be actually

practiced several recommended researches need to be conducted Therewith more research is needed to

possibly eliminate some of the assumptions underlying the methods When both practical solutions then

appear feasible client demand may be suited financial instruments more specifically by a bank Also the

advisory support would be made more objectively whereas judgments regarding several structured products

to a large extend will depend on the performance of the incorporated characteristics not the specialist

performing the advice

50 | P a g e

7 Conclusion

This research is performed to give answer to the research- question if structured products generate added

value when regarded as a portfolio instead of being considered solely as a financial instrument in a portfolio

Subsequently the question rises what this added value would be in case there is added value Before trying to

generate possible answers the first chapter explained structured products in general whereas some important

characteristics and properties were mentioned Besides the informative purpose these chapters specify the

research by a specific Index Guarantee Contract a structured product initiated and issued by lsquoVan Lanschot

Bankiersrsquo Furthermore the chapters show an important item to compare financial instruments properly

namely the return distribution After showing how these return distributions are realized for the chosen

financial instruments the assumption of a normal return distribution is rejected when considering the

structured product chosen and is even regarded inaccurate when considering an Index investment Therefore

if there is an added value of the structured product with respect to a certain benchmark question remains how

to value this First possibility is using probability calculations which have the advantage of being rather easy

explainable to clients whereas they carry the disadvantage when fast and clear comparison is asked for For

this reason the research analyses six ratios which all have the similarity of calculating one summarised value

which holds the return per one unit risk Question however rises what is meant by return and risk Throughout

the entire research return is being calculated arithmetically Nonetheless risk is not measured in a single

manner but rather is measured using several risk indications This is because clients will not all regard risk

equally Introducing four indications in the research thereby generalises the possible outcome to a larger

extend For each risk indication one of the researched ratios best fits where two rather familiar ratios are

incorporated to show they can be misleading The other four are considered appropriate whereas their results

are considered leading throughout the entire research

The first analysis concerned a historical one where solely 29 IGCrsquos each generating monthly values for the

research period September rsquo01- February lsquo10 were compared to five fictitious portfolios holding index- and

bond- trackers and additionally a pure index tracker portfolio Despite the little historical data available some

important features were shown giving rise to their incorporation in sequential analyses First one concerns

dividend since holders of the IGC not earn dividend whereas one holding the fictitious portfolio does Indeed

dividend could be the subject ruling out added value in the sequential performed analyses This is because

historical results showed no relative added value of the IGC portfolio compared to the fictitious portfolios

including dividend but did show added value by outperforming three of the fictitious portfolios when excluding

dividend Second feature concerned the provision charged by the bank When set equal to nil still would not

generate added value the added value of the IGC would be questioned Meanwhile the feature showed a

provision issue could be incorporated in sequential research due to the creation of added value regarding some

of the researched ratios Therefore both matters were incorporated in the sequential research namely a

scenario analysis using a single IGC as portfolio The scenarios were enabled by the base model created by

Ortec Finance hence the Ortec Model Assuming the model used nowadays at lsquoVan Lanschot Bankiersrsquo is

51 | P a g e

reliable subsequently the ratios could be calculated by a supplementing homemade model which can be

found on the disc located in the back of this thesis This model concludes that the specific IGC as a portfolio

generates added value compared to an investment in the underlying index in sense of generating more return

per unit risk despite the risk indication Latter analysis was extended in the sense that the last conducted

analysis showed the added value of five IGCrsquos in a portfolio When incorporating these five IGCrsquos into a

portfolio an even higher added value compared to the multiple index- portfolio is being created despite

portfolio optimisation This is generated by the diversification effect which clearly shows when comparing the

5 IGC- portfolio with each incorporated IGC individually Eventually the substantiality of the calculated added

values is shown by comparing it to the historical fictitious portfolios This way added value is not regarded only

relative but also more absolute

Finally two possible practical solutions were presented to show the possibilities of the models incorporated

When conducting further research dedicated solutions can result in client demand being suited more

specifically with financial instruments by the bank and a model which advices structured products more

objectively

52 | P a g e

Appendix

1) The annual return distributions of the fictitious portfolios holding Index- and Bond Trackers based on a research size of 29 initial dates

Due to the small sample size the shape of the distributions may be considered vague

53 | P a g e

2a)Historical Ratio comparison regarding an IGC with provision (2 upfront and 1 trailer fee) and fictitious portfolios (dividend included)

2b)Historical Ratio comparison regarding an IGC with provision (2 upfront and 1 trailer fee) and fictitious portfolios (dividend excluded)

54 | P a g e

2c)Historical Ratio comparison regarding an IGC without provision and fictitious portfolios (dividend included)

2d)Historical Ratio comparison regarding an IGC without provision and fictitious portfolios (dividend excluded)

55 | P a g e

3a) An (translated) overview of the input field of the Ortec Model serving clarification and showing issue data and ndash assumptions

regarding research date 03-11-2010

56 | P a g e

3b) The overview which appears when choosing the option to adjust the average and the standard deviation in former input screen of the

Ortec Model The figures are provided by lsquoOrtec Financersquo trough time whereas they are considered given in this research This is subject

to a main assumption that the Ortec Model forms an appropriate scenario model

3c) The overview which appears when choosing the option to adjust the implied volatility spread in former input screen of the Ortec Model

Again the figures are provided by lsquoOrtec Financersquo trough time whereas they are considered given in this research This is subject to a

main assumption that the Ortec Model forms an appropriate scenario model

57 | P a g e

4a) The result of the model supplementing the Ortec (scenario) model considering an identical IGC with the underlying AEX Index

4b) The result of the model supplementing the Ortec (scenario) model considering an identical IGC with the underlying Nikkei Index

58 | P a g e

4c) The result of the model supplementing the Ortec (scenario) model considering an identical IGC with the underlying Hang Seng Index

4d) The result of the model supplementing the Ortec (scenario) model considering an identical IGC with the underlying StandardampPoorsrsquo

500 Index

59 | P a g e

5a) An overview showing the ratio values of single IGC portfolios and multiple IGC portfolios where the optimal multiple IGC portfolio

shows superior values regarding all incorporated ratios

5b) An overview showing the ratio values of single Index portfolios and multiple Index portfolios where the optimal multiple Index portfolio

shows no superior values regarding all incorporated ratios This is due to the fact that despite the ratio optimised all (100) is invested

in the superior SampP500 index

60 | P a g e

6) The resulting weights invested in the optimal multiple IGC portfolios specified to each ratio IGC (SX5E) IGC(AEX) IGC(NKY) IGC(HSCEI)

IGC(SPX)respectively SP 1till 5 are incorporated The weight- distributions of the multiple Index portfolios do not need to be presented

as for each ratio the optimal weights concerns a full investment (100) in the superior performing SampP500- Index

61 | P a g e

7a) Overview showing the added value of the optimal multiple IGC portfolio compared to the optimal multiple Index portfolio

7b) Overview showing the added value of the equally weighted multiple IGC portfolio compared to the equally weighted multiple Index

portfolio

7c) Overview showing the added value of the optimal multiple IGC portfolio compared to the multiple Index portfolio using similar weights

62 | P a g e

8) The Credit Spread being offset against the provision charged by the specific Bank whereas added value based on the specific ratio forms

the measurement The added value concerns the relative added value of the chosen IGC with respect to the (underlying) Index based on scenarios resulting from the Ortec model The first figure regarding provision holds the upfront provision the second the trailer fee

63 | P a g e

64 | P a g e

9) The properties of the return distribution (chapter 1) calculated offsetting provision and credit spread in order to measure the IGCrsquos

suitability for a client

65 | P a g e

66 | P a g e

10) The questionnaire initiated by Andreas Bluumlmke preceded by an initial question to ascertain the clientrsquos risk indication The actualized

version of the questionnaire can be found on the disc in the back of the thesis

67 | P a g e

68 | P a g e

11) An elaboration of a second purely practical solution which is added to possibly bolster advice regarding structured products of all

kinds For solely analysing the IGC though one should rather base itsrsquo advice on the analyse- possibilities conducted in chapters 4 and

5 which proclaim a much higher academic level and research based on future data

Bolstering the Advice regarding Structured products of all kinds

Current practical solution concerns bolstering the general advice of specific structured products which is

provided nationally each month by lsquoVan Lanschot Bankiersrsquo This advice is put on the intranet which all

concerning employees at the bank can access Subsequently this advice can be consulted by the banker to

(better) advice itsrsquo client The support of this advice concerns a traffic- light model where few variables are

concerned and measured and thus is given a green orange or red color An example of the current advisory

support shows the following

Figure 28 The current model used for the lsquoAdvisory Supportrsquo to help judge structured products The model holds a high level of subjectivity which may lead to different judgments when filled in by a different specialist

Source Van Lanschot Bankiers

The above variables are mainly supplemented by the experience and insight of the professional implementing

the specific advice Although the level of professionalism does not alter the question if the generated advices

should be doubted it does hold a high level of subjectivity This may lead to different advices in case different

specialists conduct the matter Therefore the level of subjectivity should at least be diminished to a large

extend generating a more objective advice Next a bolstering of the advice will be presented by incorporating

more variables giving boundary values to determine the traffic light color and assigning weights to each

variable using linear regression Before demonstrating the bolstered advice first the reason for advice should

be highlighted Indeed when one wants to give advice regarding the specific IGC chosen in this research the

Ortec model and the home made supplement model can be used This could make current advising method

unnecessary however multiple structured products are being advised by lsquoVan Lanschot Bankiersrsquo These other

products cannot be selected in the scenario model thereby hardly offering similar scenario opportunities

Therefore the upcoming bolstering of the advice although focused solely on one specific structured product

may contribute to a general and more objective advice methodology which may be used for many structured

products For the method to serve significance the IGC- and Index data regarding 50 historical research dates

are considered thereby offering the same sample size as was the case in the chapter 4 (figure 21)

Although the scenario analysis solely uses the underlying index as benchmark one may parallel the generated

relative added value of the structured product with allocating the green color as itsrsquo general judgment First the

amount of variables determining added value can be enlarged During the first chapters many characteristics

69 | P a g e

where described which co- form the IGC researched on Since all these characteristics can be measured these

may be supplemented to current advisory support model stated in figure 28 That is if they can be given the

appropriate color objectively and can be given a certain weight of importance Before analyzing the latter two

first the characteristics of importance should be stated Here already a hindrance occurs whereas the

important characteristic lsquoparticipation percentagersquo incorporates many other stated characteristics

Incorporating this characteristic in the advisory support could have the advantage of faster generating a

general judgment although this judgment can be less accurate compared to incorporating all included

characteristics separately The same counts for the option price incorporating several characteristics as well

The larger effect of these two characteristics can be seen when looking at appendix 12 showing the effects of

the researched characteristics ceteris paribus on the added value per ratio Indeed these two characteristics

show relatively high bars indicating a relative high influence ceteris paribus on the added value Since the

accuracy and the duration of implementing the model contradict three versions of the advisory support are

divulged in appendix 13 leaving consideration to those who may use the advisory support- model The Excel

versions of all three actualized models can be found on the disc located in the back of this thesis

After stating the possible characteristics each characteristic should be given boundary values to fill in the

traffic light colors These values are calculated by setting each ratio of the IGC equal to the ratio of the

(underlying) Index where subsequently the value of one characteristic ceteris paribus is set as the unknown

The obtained value for this characteristic can ceteris paribus be regarded as a lsquobreak even- valuersquo which form

the lower boundary for the green area This is because a higher value of this characteristic ceteris paribus

generates relative added value for the IGC as treated in chapters 4 and 5 Subsequently for each characteristic

the average lsquobreak even valuersquo regarding all six ratios times the 50 IGCrsquos researched on is being calculated to

give a general value for the lower green boundary Next the orange lower boundary needs to be calculated

where percentiles can offer solution Here the specialists can consult which percentiles to use for which kinds

of structured products In this research a relative small orange (buffer) zone is set by calculating the 90th

percentile of the lsquobreak even- valuersquo as lower boundary This rather complex method can be clarified by the

figure on the next page

Figure 28 Visualizing the method generating boundaries for the traffic light method in order to judge the specific characteristic ceteris paribus

Source Homemade

70 | P a g e

After explaining two features of the model the next feature concerns the weight of the characteristic This

weight indicates to what extend the judgment regarding this characteristic is included in the general judgment

at the end of each model As the general judgment being green is seen synonymous to the structured product

generating relative added value the weight of the characteristic can be considered as the lsquoadjusted coefficient

of determinationrsquo (adjusted R square) Here the added value is regarded as the dependant variable and the

characteristics as the independent variables The adjusted R square tells how much of the variability in the

dependant variable can be explained by the variability in the independent variable modified for the number of

terms in a model38 In order to generate these R squares linear regression is assumed Here each of the

recommended models shown in appendix 13 has a different regression line since each contains different

characteristics (independent variables) To serve significance in terms of sample size all 6 ratios are included

times the 50 historical research dates holding a sample size of 300 data The adjusted R squares are being

calculated for each entire model shown in appendix 13 incorporating all the independent variables included in

the model Next each adjusted R square is being calculated for each characteristic (independent variable) on

itself by setting the added value as the dependent variable and the specific characteristic as the only

independent variable Multiplying last adjusted R square with the former calculated one generates the weight

which can be addressed to the specific characteristic in the specific model These resulted figures together with

their significance levels are stated in appendix 14

There are variables which are not incorporated in this research but which are given in the models in appendix

13 This is because these variables may form a characteristic which help determine a proper judgment but

simply are not researched in this thesis For instance the duration of the structured product and itsrsquo

benchmarks is assumed equal to 5 years trough out the entire research No deviation from this figure makes it

simply impossible for this characteristic to obtain the features manifested by this paragraph Last but not least

the assumed linear regression makes it possible to measure the significance Indeed the 300 data generate

enough significance whereas all significance levels are below the 10 level These levels are incorporated by

the models in appendix 13 since it shows the characteristic is hardly exposed to coincidence In order to

bolster a general advisory support this is of great importance since coincidence and subjectivity need to be

upmost excluded

Finally the potential drawbacks of this rather general bolstering of the advisory support need to be highlighted

as it (solely) serves to help generating a general advisory support for each kind of structured product First a

linear relation between the characteristics and the relative added value is assumed which does not have to be

the case in real life With this assumption the influence of each characteristic on the relative added value is set

ceteris paribus whereas in real life the characteristics (may) influence each other thereby jointly influencing

the relative added value otherwise Third drawback is formed by the calculation of the adjusted R squares for

each characteristic on itself as the constant in this single factor regression is completely neglected This

therefore serves a certain inaccuracy Fourth the only benchmark used concerns the underlying index whereas

it may be advisable that in order to advice a structured product in general it should be compared to multiple

38

wwwhedgefund-indexcom

71 | P a g e

investment opportunities Coherent to this last possible drawback is that for both financial instruments

historical data is being used whereas this does not offer a guarantee for the future This may be resolved by

using a scenario analysis but as noted earlier no other structured products can be filled in the scenario model

used in this research More important if this could occur one could figure to replace the traffic light model by

using the scenario model as has been done throughout this research

Although the relative many possible drawbacks the advisory supports stated in appendix 13 can be used to

realize a general advisory support focused on structured products of all kinds Here the characteristics and

especially the design of the advisory supports should be considered whereas the boundary values the weights

and the significance levels possibly shall be adjusted when similar research is conducted on other structured

products

72 | P a g e

12) The Sensitivity Analyses regarding the influence of the stated IGC- characteristics (ceteris paribus) on the added value subdivided by

ratio

73 | P a g e

74 | P a g e

13) Three recommended lsquoadvisory supportrsquo models each differing in the duration of implementation and specification The models a re

included on the disc in the back of this thesis

75 | P a g e

14) The Adjusted Coefficients of Determination (adj R square) for each characteristic (independent variable) with respect to the Relative

Added Value (dependent variable) obtained by linear regression

76 | P a g e

References

Bluumlmke (2009) lsquoHow to invest in Structured products A guide for Investors and Asset

Managersrsquo ISBN 978-0-470-74679

THailes (2009) Structured products in Challenging Times structprodchalltimesspeech ISDA

Wolfgang Breuer (2009) Retail banking and behavioral financial engineering The case of structured products Journal of Banking amp Finance Volume 31 Issue 3 March 2007 Pages 827-844

Brian C Twiss (2005) Forecasting market size and market growth rates for new products

Journal of Product Innovation Management Volume 1 Issue 1 January 1984 Pages 19-29

JD Coval JW Jurek E Stafford (2008) The Economics of Structured Finance Harvard

Business School Finance Working Paper No 09-060

Francis Galton inventor of the lsquoQuincunxrsquo also known as the Galton board thereby explaining

normal distribution and the standard deviation (1850)

John C Frain (2006) Total Returns on Equity Indices Fat Tails and the α-Stable Distribution

Pawel M Zareba (2010) Local Volatility Model paper for internal use only KempenampCo

Wiliam FSharpe(1966) The sharpe Ratio the best of the journal of finance page 169-215

Adrian Blundell-Wignall (2007) An Overview of Hedge Funds and Structured products Issues in Leverage and Risk ISSN 0378-651X

RC Scott PAHorvath (1980) On The Directionof Preference for Moments of Higher Order

Than The variance The journal of finance vol XXXV no4

L R GoacutemeP Berrone MFranco Santos (2005) Compensation and Organisational Performance theory research and practice ISBN 978-0-7656-2251-8

JPeacutezier AWhite (2006) The Relative Merits of Investable Hedge Fund Indices and of Funds

of Hedge Funds in Optimal Passive Portfolios ICMA Centre Discussion Papers in Finance DP

2006-10

Keating WFShadwick (2002) A Universal Performance Measure The Finance Development Centre Jan2002


Poddig Dichtl amp Petersmeier (2003) Understanding the Effect of Risk aversion p 135

77 | P a g e

Keating WFShadwick (2002) A Universal Performance Measure The Finance Development

Centre Jan2002

YYamai TYoshiba (2002) Comparative Analyses of Expected Shortfall and Value at Risk

Their Estimation Error Decomposition and Composition Journal Monetary and Economic

Studies Bank of Japan page 87- 121

K Bhanot SAMansi JK Wald (2008) Takeover risk and the correlation between stocks and

bonds Journal of Emperical Finance Volume 17 Issue 3 June 2010 pages 381-393

GJ Alexander (2002) Economic implications of using a mean-VaR model for portfolio

selection A comparison with mean-variance analysis Journal of Economic Dynamics and

Control Volume 26 Issue 7-8 pages 1159-1193

MJBest RJGrauer (2002) The analytics of sensitivity analysis for mean-variance portfolio problems International Review of Financial Analysis Volume 1 Issue 1 Pages 17- 97

HEilat BGolany Ashtub (2005) Constructing and evaluating balanced portfolios Eropean

Journal of Operational Research Volume 172 Issue 3 Pages 1018- 1039

PMonteiro (2004) Forecasting HedgeFunds Volatility a risk management approach

working paper series Banco Invest SA file 61

SUryasev TRockafellar (1999) Optimization of Conditional Value at Risk University of

Florida research report 99-4

HScholz M Wilkens (2005) A Jigsaw Puzzle of Basic Risk-adjusted Performance Measures the Journal of Performance Management spring 2005

H Gatfaoui (2009) Estimating Fundamental Sharpe Ratios Rouen Business School

VGeyfman 2005 Risk-Adjusted Performance Measures at Bank Holding Companies with Section 20 Subsidiaries Working paper no 05-26

2 | P a g e

Abstract




the Index Guarantee Contract (hereafter lsquoIGCrsquo) The product is held by a significant group of lsquoVan Lanschotsrsquo




Bankiersrsquo In order to realize a portfolio as such research needs to be conducted on the possible added value of

this portfolio relative to certain benchmarks This added value subsequently should be expressed in (a) certain

value(s) upon which specific conclusions can be drawn in historical- and in future perspective Once this added

value is determined translation is preferred to offer potential practical solutions These are the main issues

which are conducted in this research in order to give answer to the main research question What is the added

value of structured products as a portfolio

3 | P a g e

Introduction 4










21 General 17










31 General 29






41 General 34






51 General 4141






61 General 46



7 Conclusion 50

Appendix 52

References 76

4 | P a g e

Introduction
























5 | P a g e


























6 | P a g e




































7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















3 | P a g e

Introduction 4










21 General 17










31 General 29






41 General 34






51 General 4141






61 General 46



7 Conclusion 50

Appendix 52

References 76

4 | P a g e

Introduction
























5 | P a g e


























6 | P a g e




































7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















4 | P a g e

Introduction
























5 | P a g e


























6 | P a g e




































7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















5 | P a g e


























6 | P a g e




































7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















6 | P a g e




































7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















7 | P a g e










required























8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















8 | P a g e







their shine7















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















9 | P a g e



























10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















10 | P a g e




















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















11 | P a g e


















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















12 | P a g e


















14



13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















13 | P a g e















Source homemade









chapter



14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















14 | P a g e



16 Valuing the IGC







Source Homemade
















interest

15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















15 | P a g e








date








shown in figure 8
















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















16 | P a g e










is set permanently











17 | P a g e


21 General
























18 | P a g e
















reads as follows

(2)









19 | P a g e
















(4)




20 | P a g e
















(5)












21 | P a g e







(6)









(7)




21



22 | P a g e








stated

(8) (9)







(10)




23 | P a g e
















(11)





(12)

25

wwwInvestopediacom

24 | P a g e
















clarification


Source homemade





26



25 | P a g e

(13)




chapters
















on

26 | P a g e


Source homemade






following


Source homemade

27 | P a g e







Source homemade














28 | P a g e


Source homemade






















chapter

29 | P a g e


31 General










conclusion















30 | P a g e






33 The Benchmarks





















27



31 | P a g e


Source Bloomberg











IGC

1 Dividend

2 Provision

1 Dividend






2 Provision



32 | P a g e

















this noteworthiness















Index Tracker



33 | P a g e





















34 | P a g e

4 Scenario Analysis

41 General





















The input


The output


The input






30

wwwOrtec-financecom

35 | P a g e



































first

36 | P a g e




Source Ortec Model












The output



rd 2010

Source Ortec Model

31


37 | P a g e













2010




Source Homemade







38 | P a g e



















Source Homemade



39 | P a g e



















Source Homemade







40 | P a g e



substantial




















value

41 | P a g e


51 General




























42 | P a g e












The AEX index

The Nikkei225 index

The Hans Seng index




















32




43 | P a g e













Source Homemade

44 | P a g e



































34




45 | P a g e



















portfolio










in a portfolio

46 | P a g e


61 General
























Provision

Credit Risk





36


47 | P a g e
















above















37


74679-0

48 | P a g e


Source Homemade









Source Homemade





49 | P a g e












50 | P a g e

7 Conclusion




































51 | P a g e














objectively

52 | P a g e

Appendix



53 | P a g e



54 | P a g e



55 | P a g e



56 | P a g e







57 | P a g e



58 | P a g e



500 Index

59 | P a g e






60 | P a g e




61 | P a g e



portfolio


62 | P a g e



63 | P a g e

64 | P a g e



65 | P a g e

66 | P a g e



67 | P a g e

68 | P a g e































69 | P a g e




























Source Homemade

70 | P a g e



























upmost excluded










38


71 | P a g e










products

72 | P a g e


ratio

73 | P a g e

74 | P a g e



75 | P a g e



76 | P a g e

References




















2006-10




77 | P a g e


Centre Jan2002



















Documents

The Added Value of Structured Products as a Portfolio