Beware the pitfalls of averaging in structured products
The use of averaging when determining returns is common in many structured products. But what advantages are there in applying the method over simple point-to-point valuation?
The use of averaging in structured products – determining a product's returns by measuring the value of the underlying asset at set points over its lifetime, rather than simply at the strike date and at maturity – is common enough. But what are the advantages and disadvantages in applying the method?
Proponents argue averaging is useful for growth-focused products, where the investor is long one or more options, because it serves as a way of reducing the volatility – and therefore the cost – of
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