# How does the underlying affect the risk-return profiles of structured products?

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## Abstract

Regulators of some of the major markets have adopted value at risk (VaR) as the risk measure for structured products. Under the mean-VaR framework, this paper discusses the impact of the underlying’s distribution on structured products. We expand the expected return and the VaR of a structured product with its underlying’s moments (mean, variance, skewness, and kurtosis), so that the impact of the moments can be investigated simultaneously. Results are tested by Monte Carlo and historical simulations. The findings show that for the majority of structured products, underlyings with large positive skewness are preferred. The preferences for the variance and the kurtosis of the underlying are both ambiguous.

## Keywords

Value at risk Structured products Skewness Kurtosis## JEL Classification

G11 C02## Notes

### Acknowledgements

The author thanks Markus Schmid (the editor), the anonymous referee, Marc Oliver Rieger, Vincent Xiang (discussant), Mohammad M. Mousavi (discussant), conference participants at the 2nd International Conference on Future and Other Derivative Markets (Beijing), the 1st Paris Financial Management Conference, and the 6th IFABS Conference (Lisbon), as well as seminar participants at Xiamen University.

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