Pricing chained dynamic fund protection

• We propose a chained dynamic fund protection (CDFP).
• Protection of CDFP is activated only when asset reaches upper protection line.
• We also derive a closed-form formula for CDFP using reflection principle.

In this paper, we propose a new kind of dynamic fund protection (DFP). In contrast to the usual DFP, our newly developed DFP has two protection levels and protection is activated only when the value of underlying asset reaches upper protection levels. This kind of product has a structure similar to that of the chained barrier option proposed by Jun and Ku (2012). In this context, we name our newly designed equity-linked product as chained dynamic fund protection (CDFP). Buying CDFP can be advantageous for both vendors and investors compared to buy usual DFP. Relatively small downside risk for CDFP is beneficial for vendors. Also for investors, the price they cost for protection of CDFP is cheaper than that of usual DFP. Furthermore, investors can handle the price of protection by adjusting the level of upper protection as they desired. In this paper, we derive a closed-form formula for CDFP using reflection principle under Black–Scholes framework. Furthermore, we represent numerical results for values of CDFP according to various parameters.