Equity Linked Note Valuation and Risk

Equity-linked notes are flexible financial products that give investors favorable capital treatment. The payoff of a note depends on the performance of a basket of equities or indices averaged over a certain period, but is bounced below by a guaranteed amount. This article presents a new model for valuing equity-linked notes. We derive analytical formulas for pricing the note and computing the corresponding hedge ratios. The model appears to be accurate over a wide range of valuation parameters based on numerical studies. Finally, we use our model to value a segregated fund with a guarantee amount at maturity