Managing structured bonds: An analysis using RAROC and EVA

Abstract

The paper investigates a decision criterion for structured bonds portfolio choices. The main issue is the application of risk-adjusted indicators as tools to select either the asset portfolio given a structured bond, or the bond structure given an existing coverage asset portfolio. Such an indicator is suitable for the appraisal of both portfolio management and the potential profits of the structured issue. The selection tool is put into an asset and liability management decision-making context, where the relationship between the expected profit and the capital-at-risk are compared in order to evaluate the issue of the bond and the expected rate of return of the whole portfolio. The case is referred to an equity-linked bond and treated by means of Monte Carlo simulations to identify the best portfolio according to the issuer targets and constraints.