Fairmat Example

Structured bond with napoleon option

Napoleon options are OTC financial instrument that give the traders the opportunity to manage with the market volatility.
The payoff depends on the performance of a single stock or index, following this formula at each time t

max[ floor(t), cpn(t)+worst(t) ] it=1,2,...,n

where floor(t) is the minimum rate, cpn(t) is a coupon rate and worst(t) is a function defined as

worst(t) = min( Rj ) j=1,2,...,m

the worst j-th performance of the underlying (Rj) among m oservation in each period.

As you see, when the market volatility is small, the buyer of a napoleon option will have a good chance to get a payoff around the cpn. Otherwise, when the market volatility is large, the buyer will get at least the floor rate.
In the example we have a structured bond that pays a 4% coupn the first year and a Napoleon option payoff from second year to the end. The option underlying is the Euro Stoxx 50 index, "n" equals to 6 (years) and "m" equals to 12 (montly performance during an year).