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+Chapter 32: Structured Products 633 
+does. The problem for the short seller of the PER CS is that he has to pay a lot for 
+the imbedded call that affords him the protection from upside risk. The actual price 
+that he has to pay is the dividends that he, as a short seller, must pay out. But this can 
+also be thought of as having purchased a long-term call out-of-the-money as protec­
+tion for a short sale of common stock. The long-term call is bound to be expensive, 
+since it has a great deal of time premium remaining; moreover, the fact that it is out­
+of-the-money means that one is also assuming the price risk from the current com­
+mon price up to the strike of the call. Hence, this out-of-the-money amount plus the 
+time value premium of the imbedded call can add up to a substantial amount. 
+This discussion mainly pertains to shorting a PERCS near its issuance price and 
+date. However, one is free to short PERCS at any time if they can be borrowed. They 
+may be a more attractive short when they have less time remaining until the maturi­
+ty date, or when the underlying common is closer to the redemption price. 
+Overall, one would not normally expect the short sale of a PERCS to be vastly 
+superior to a synthetic put constructed with listed options. Arbitrageurs would be 
+expected to eliminate such a price discrepancy if one exists. However, if such a situ­
+ation does present itself, the short seller of the PERCS should realize he has a posi­
+tion that is the equivalent of owning a put, and plan his strategy accordingly. 
+DETERMINING THE ISSUE PRICE 
+An investor might wonder how it is always possible for the PERCS and the common 
+to be at the same price at the issue date. In fact, the issuing company has two vari­
+ables to work with to ensure that the common price and the PERCS issue price are 
+the same. One variable is the amount of the additional dividend that the PERCS will 
+pay. The other is the redemption price of the PER CS. By altering these two items, 
+the value of the covered write (i.e., the PERCS) can be made to be the same as the 
+common on the issue date. 
+Figure 32-7 shows the values that are significant in determining the issue price 
+of the PE RCS. The line marked Final Value is the shape of the profit graph of a cov­
+ered write at expiration. This is the PERCS's final value at its maturity. The curved 
+line is the value of the covered write at the current time, well before expiration. Of 
+course, these two are linked together. 
+The line marked Common Stock is merely the profit or loss of owning stock. 
+The curved line (present PERCS value) crosses the Common Stock line at the issue 
+price. 
+At the time of issuance, the difference between the current stock price and the 
+eventual maturity value of the PER CS is the present value of all the additional divi­
+dends to be paid. That amount is marked a1/11e vertical line on the graph. Therefore,