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Leverage Certificates - A Case of Innovative Financial Engineering

This paper introduces a new financial product named Leverage Certificates and provides detailed descriptions of the product specifications. We show that the payoff of a Leverage Certificate can be duplicated with a portfolio of securities (i.e. bonds, plain vanilla options and exotic options). A pricing formula is developed to price the certificates. A certificate issued by Credit Suisse First Boston is presented as an example to examine how well the model fits empirical data. The results show that issuing Leverage Certificates is a profitable business and the results are in line with previous studies pricing other structured products.