Shout Floors

Posted: 3 May 1998

See all articles by Terry H. F. Cheuk

Terry H. F. Cheuk

The University of Hong Kong - School of Business

Ton Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management; Tinbergen Institute

Date Written: April 1996

Abstract

It is common to find index funds being marketed with a protective floor. It gives investors the upside potential of the equity market, while protecting them from possible losses. In this paper, we describe a new type of protective floor, in which the floor level is not set at inception of the contract. Instead, during the contract life, the holder can give notice --- he shouts --- to set the floor at the prevailing index level. It is shown in the paper, that the optimal shout policy does not depend on the index level, but only on time-to-maturity. The concept is generalized further to multiple-shout floors. If the index hits a higher level after the first shout, the holder is allowed to shout again to reset the floor at the then prevailing (higher) index level. An efficient numerical model is proposed to price the multiple-shout floors.

JEL Classification: G13

Suggested Citation

Cheuk, Terry H. F. and Vorst, Ton A.C.F., Shout Floors (April 1996 ). Available at SSRN: https://ssrn.com/abstract=7633

Terry H. F. Cheuk (Contact Author)

The University of Hong Kong - School of Business ( email )

Pokfulam Road
Hong Kong
Hong Kong

Ton A.C.F. Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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