OTC Derivatives for Retail Investors: The Case of Equity Linked Saving

Abstract: In this paper we report on a new class of derivative products which we refer to as equity-linked savings products. Equity-linked savings products require investors to pay periodic instalments in return for a predefined equity-linked payoff at maturity. We discuss the structuring, hedging, pricing and marketing of a variety of equity-linked savings products in detail, paying particular attention to the case of The Netherlands where equity-linked savings products are currently very popular with an estimated USD 2 billion issued over the last three years. Reverse engineering of a recent issue shows that the profit margins which product providers may be able to achieve on equity-linked savings products are extremely high.