China’s financial market is in a stage of rapid development. We need diversified financial derivatives to hedge the risk and increase wealth of investors. This paper will introduce a derivative which can decrease the risk and increase the rate of return. The derivative is an American option written on a Principal Guaranteed Fund. Our research is a theoretical study. We hope that our effort of financial innovation may boost related industry. To design this derivative, we need firstly to find out an accuracy and efficient methodology to price American options, and then we need to introduce the concept of the principal guaranteed investment strategy. Finally, we artificially design an American option written on a principal guaranteed fund. We will illustrate how to pricing this derivative product based on the American option pricing methodology introduced previously in this thesis. We will carry out the Monte Carlo simulation to investigate the risk and return profile generated by this artificial product. We consider the standard least square approach pricing method of American option (Longstaff F. and E. Schwartz, 2001). The fundamental economic principal of the method is to compare the continuation value and the intrinsic value at each time step which American option can be exercised. In this paper, the contribution is twofold. First, we focus on comparing the results obtained from using different basis functions in least square regression in Hilbert Space. We found that the first four Laguerre polynomials is the best choice for the basis function for the least square method and it will provide the unbiased estimation. Second, we applied the pricing model to a derivative based on a modified Constant Proportion Portfolio Insurance (CPPI) which is called Ratcheted Floor Variable Proportion Portfolio Insurance (RF-VPPI) strategy. The RF-VPPI strategy limited the risk of a sudden decline of the risky assets market which may impact the guaranteed fund. In this way, the option on 3 a RF-VPPI may be useful to hedge the downside risk of capital market and amplify the investors’ return. Key words: American option, Option pricing method, Monte Carlo simulation, Least square estimation, guaranteed fund, CPPI, RF-VPPI.