On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds)

Abstract

This paper examines and compares several standard financial structured products whose performance is based on smoothing the return of an underlying asset (e.g. financial market indices, baskets of stocks). The returns of such products are based on various averages of intermediate values of the risky asset return. They are typically path-dependent. We investigate two main types of these financial products providing a guarantee at maturity: one is linked to an Asian call option and the other linked to an average of positive performances of the risky asset, which is an average of call options. We examine and illustrate their performances within a standard jump-diffusion model (i.e. the double exponential Levy process), using various criteria such as basic properties of the cumulative distribution functions of their returns and their respective performances with respect to Kappa measures. We also compare them to the most common structured financial contract, namely Option Based Portfolio Insurance. Surprisingly, our study reveals that funds based on averages of calls do better than Asian funds, both on various performance measures and also in terms of their respective probabilities of providing merely the guarantee at maturity.