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Article

Optimal Investment in Structured Bonds

Pernille Jessen and Peter Løchte Jørgensen
The Journal of Derivatives Summer 2012, 19 (4) 7-28; DOI: https://doi.org/10.3905/jod.2012.19.4.007
Pernille Jessen
is a Ph.D. from Aarhus University in Aarhus, Denmark.
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  • For correspondence: p.jessen.mail@gmail.com
Peter Løchte Jørgensen
is a professor at Aarhus University in Aarhus, Denmark.
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  • For correspondence: plj@asb.dk
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Abstract

Structured investment vehicles for retail customers have become increasingly prevalent, and also increasingly complex. Yet numerous articles have shown that many popular structures offer rather poor performance for the buyer, relative to the expected payoff and to the cost of producing that payoff with a combination of simpler derivative contracts. Retail investors seem to like payoffs resembling that of a protectiveput strategy very much, with exposure on the upside but limited risk of loss on the downside. Why should they be willing to pay more for such products than they are worth? In this article, Jessen and Jørgensen show that such structured products can make sense for an investor with an ordinary utility function if the diversification value of exposure to the underlying index is great enough and the structured product is the only way they can obtain exposure to that index.

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The Journal of Derivatives: 19 (4)
The Journal of Derivatives
Vol. 19, Issue 4
Summer 2012
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Optimal Investment in Structured Bonds
Pernille Jessen, Peter Løchte Jørgensen
The Journal of Derivatives May 2012, 19 (4) 7-28; DOI: 10.3905/jod.2012.19.4.007

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Optimal Investment in Structured Bonds
Pernille Jessen, Peter Løchte Jørgensen
The Journal of Derivatives May 2012, 19 (4) 7-28; DOI: 10.3905/jod.2012.19.4.007
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  • Article
    • Abstract
    • INVESTMENT IN STRUCTURED BONDS
    • INVESTMENT OPPORTUNITIES
    • OPTIMAL INVESTMENT
    • RESULTS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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