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training_data/curated/text/e79e52fcb5d0c1a485b02309bf3866b6f3c6511bdf559a243821af18c0c4fbc4.txt

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+Cl,apter 32: Structured Produds 601 
+Now, a rate of return of 2.43% is rather paltry considering that the risk-free 
+T•bill rate was more than twice that amount. However, in this case, you own a call 
+option on the stock market and get to earn 2.43% per year while you own the call. In 
+other words, "they" are paying you to own a call option! That's a situation that 
+doesn't arise too often in the world of listed options. 
+If we introduce cash value into this computation, the discrepancy is even larg­
+er. Using the $MID price of 177.59, the cash value can be computed as: 
+Cash Value = 10 + 11.5 x (177.59/166.10 - 1) = 10.80 
+Thus, with SIS trading at 8. 75 at that time, it was actually trading at a whopping 
+19% discount to its cash value of 10.80. Even if the stock market declined, the guar­
+antee price of 10 was still there to provide a minimal return. 
+In actual practice, a structured product will not normally trade at a discount to its 
+guarantee price while the cash value is higher than the guarantee price. There's only 
+a narrow window in which that occurs. 
+There have been times when the stock market has declined rather substantial­
+ly while these products existed. We can observe the discounts at which they then 
+traded to see just how they might actually behave on the downside if the stock mar­
+ket declined after the initial offering date. Consider this rather typical example: 
+Example: In 1997, Merrill Lynch offered a structured product whose underlying 
+index was Japan's Nikkei index. At the time, the Nikkei was trading at 20,351, so that 
+was the striking price. The participation rate was 140% of the increase of the Nikkei 
+above 20,351 - a very favorable participation rate. This structured product, trading 
+under the symbol JEM, was designed to mature in five years, on June 14, 2002. 
+As it turned out, that was about the peak of the Japanese market. By October of 
+1998, when markets worldwide were having difficulty dealing with the Russian debt 
+crisis and the fallout from a major hedge fund in the U.S. going broke, the Nikkei had 
+plummeted to 13,300. Thus, the Nikkei would have had to increase in price by just 
+over 50% merely to get back to the striking price. Hence, it would not appear that 
+JEM was ever going to be worth much more than its guarantee price of 10. 
+Since we have actual price histories of JEM, we can review how the market­
+place viewed the situation. In October 1998, JEM was actually trading at 8.75 - only 
+1.25 points below its guarantee price. That discount equates to an annual com­
+pounded rate of 3.64%. In other words, if one were to buy JEM at 8.75 and it 
+matured at 10 about 40 months later, his return would have been 3.64% compound­
+ed annually. That by itself is a rather paltry rate of return, but one must keep in mind 
+that he also would own a call option on the Nikkei index, and that option has a 140% 
+participation rate on the upside.