The locally capped globally floored cliquet (LCGF) is the standard cliquet sold in retail structured products: each period's return is capped (the investor doesn't benefit from very large gains) and floored (the investor doesn't lose below a floor in any period), but the total payout is also globally floored (the principal is guaranteed). This note prices the LCGF under local vol and Heston, quantifies the model discrepancy, and identifies the forward-smile sensitivity that drives it.
Learning objectives. By the end of this note you should be able to:
- state the LCGF payoff precisely and decompose it into forward-start call spreads;
- compute the LCGF price under local vol and Heston using simulation;
- explain which Heston parameters drive the local-vol vs stochastic-vol discrepancy.
In this lesson
- 2.1 The LCGF payoff
- 2.2 Pricing under local vol vs Heston
Before you start
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