The pricing of leverage products: An empirical investigation of the German market for ‘long’ and ‘short’ stock index certificates

This paper describes the first thorough empirical analysis of the pricing of leverage products in the German retail market. These mainly exchange-traded products with an impressive trading volume are frequently advertised as long and short futures contracts, although they are theoretically equivalent to one-sided barrier options. Issuers’ daily quotes for stock index products are compared to (i) theoretical values derived from the prices of Eurex options and to (ii) boundaries obtained from semi-static superhedging strategies. For the vast majority of products, bid and ask quotes significantly exceed both theoretical values and upper hedging boundaries, thus providing almost risk-free profits for the issuers.