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training_data/curated/text/bc8bc21c09e82b19f32bb62bf69a5defbadb32ec81b440cfb94e0297687bf072.txt

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+O,apter 32: Structured Products 591 
+dramatically, or perhaps he needs cash for something else - both might be reasons 
+that the holder of the shares would want to sell before maturity. 
+Such a product has appeal to many investors. In fact, if one thought that the 
+stock market was a "long-term" buy, this would be a much safer way to approach it 
+than buying a portfolio of stocks that might conceivably be much lower in value seven 
+years hence. The risk of the structured product is that the underwriter might not be 
+able to pay the $10 obligation at maturity. That is, if the major institutional bank or 
+brokerage firm who underwrote these products were to go out of business over the 
+course of the next seven years, one might not be able to redeem them. In essence, 
+then, structured products are really forms of debt (senior debt) of the brokerage firm 
+that underwrote them. Fortunately, most structured products are underwritten by 
+the largest and best-capitalized institutions, so the chances of a failure to pay at matu­
+rity would have to be considered relatively tiny. 
+How does the bank create these items? It might seem that the bank buys stock 
+and buys a put and sells units on the combined package. In reality, the product is not 
+normally structured that way. Actually, it is not a difficult concept to grasp. This 
+example shows how the structure looks from the viewpoint of the bank: 
+Example: Suppose that the bank wants to raise a pool of $1,000,000 from investors 
+to create a structured product based on the appreciation of the S&P 500 index over 
+the next seven years. The bank will use a part of that pool of money to buy U.S. zero­
+coupon bonds and will use the rest to buy call options on the S&P 500 index. 
+Suppose that the U.S. government zero-coupon bonds are trading at 60 cents 
+on the dollar. Such bonds would mature in seven years and pay the holder $1.00. 
+Thus, the bank could take $600,000 and buy these bonds, knowing that in seven 
+years, they would mature at a value of $1,000,000. The other $400,000 is spent to buy 
+call options on the S&P 500 index. Thus, the investors would be made whole at the 
+end of seven years even if the options that were bought expired worthless. This is why 
+the bank can "guarantee" that investors will get their initial money back. 
+Meanwhile, if the stock market advances, the $400,000 worth of call options will 
+gain value and that money will be returned to the holders of the structured product 
+as well. 
+In reality, the investment bank uses its own money ($1,000,000) to buy the secu­
+rities necessary to structure this product. Then they make the product into a legal 
+entity (often a unit trust) and sell the shares (units) to the public, marking them up 
+slightly as they would do with any new stock brought to market. 
+At the time of the initial offering, the calls are bought at-the-money, meaning 
+the striking price of the calls is equal to the closing price of the S&P 500 index on the