Optimal Investment Strategies for Guaranteed Equity-linked Notes

A competitive investment institution is capable of helping investors ensure maximization of their return on investment(ROI) in equity-linked notes.This study proposes an optimal investment strategy for guaranteed equity-linked notes from the perspective of investment institutions.The current literature studies optimal investment strategy based on the assumption of simple returns with low limits.However,this assumption is not sufficient to understand the investment strategy for guaranteed equity-linked notes.This paper adopts a class of standard profit structures of guaranteed equity-linked notes as a reference standard to derive both lower and upper return guarantees limits.A guarantee of ROI can further complicate the process of formulating an optimal investment strategy.This paper solves optimal investment problems associated with new forms of return guarantees by introducing the bull spreads option.The stochastic optimal control method is adopted to improve the existing investment portfolio theory.The result indicates that optimal investment strategies should include three parts:speculative portfolio strategy,hedge strategy for stochastic interest rates,and hedge strategy for a ROI guarantee.The investment portfolio can affect the option price of an asset,thereby affecting the first order derivative of option price and interest rate in hedge strategies for ROI guarantee and stochastic interest rates.The investment strategy is adjusted dynamically through option items in order to ensure that investment strategy is optimal.Our result shows that the optimal wealth of our proposed investment strategy is always higher than the guaranteed ROI.In conclusion,the proposed investment strategy ensures that investors can at least have a guaranteed ROI.