An exploratory study of a risk neutral pricing model of accumulators

Abstract

Purpose

Accumulators are cutting‐edge stock derivative investments that have been the subject of much controversy in Hong Kong over the past year. Accumulators are exotic options composed of a full year of daily long up‐and‐out call options and short up‐and‐out put options. Because accumulators are so new, the understanding of accumulators is currently very limited. This paper attempts to characterize and understand the properties of this fairly unknown and new stock derivative investment.

Design/methodology/approach

The study analyzed and characterized accumulators based on observations from past history of 11 stocks of the Hang Seng Index. Using historical stock data covering from January 3, 2006, and onward, the profit and loss for each accumulator contract was calculated.

Findings

Through the research it is understood that the profit and loss of accumulator contracts depends primarily on the following factors: knockout percentage, discount percentage, variability of the underlying stock, and the overall market trends, among other factors.

Originality/value

This pioneer simulation is an empirical exploratory post factum study that gives researchers and practitioners further insight how to formulate a risk neutral pricing model for accumulators in the future.

Citation

Kwong, T., Fok, D., Kwong, K. and Fok, L. (2012), "An exploratory study of a risk neutral pricing model of accumulators", Journal of Asia Business Studies, Vol. 6 No. 1, pp. 93-113. https://doi.org/10.1108/15587891211191407