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training_data/relevant/text/a3474d437179fca1805b71c3ab457f0f6848934fc843514d23a777a757275963.txt

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+624 Part V: Index Options and Futures 
+FIGURE 32-6. 
+PERCS price estimate versus common stock. 
+44 
+(I) 
+iii 39 6 Months 
+E 
+~ w 
+(I) 
+u 
+ct 34 
+Cf) 
+(.) 
+a: w a. 
+29 
+0 1-.J. ____ ,__ ___ ...._ ___ _._ ___ __._ ___ _.__ 
+25 30 35 40 
+Stock Price 
+45 50 
+First, consider the out-of-the-money situation. If the underlying common 
+declines in price, the PERCS will not decline as fast because the additional dividends 
+will provide yield support. The PER CS will therefore trade at a higher price than the 
+common. Howeve1~ as the maturity date nears and the remaining number of addi­
+tional dividends dwindles to a small amount, then the PER CS price and the common 
+price will converge. 
+The opposite effect occurs if the underlying common moves higher. The 
+PERCS will trade at a lower price than the common when the common trades above 
+the issue price. In fact, since there is a redemption price on the PERCS, it will not 
+trade higher than the redemption price. The common, however, has no such restric­
+tion, so it could continue to trade at prices significantly higher than the PERCS does. 
+These points are illustrated in Figure 32-6, which contains the price curves of two 
+PER CS: one at issuance, thus having three years remaining, and the other with just six 
+months remaining until the maturity of the PERCS. For purposes of comparison, it 
+was assumed that there is no sliding redemption feature involved. Several significant 
+points can be made from the figure. First, notice that the PERCS and the common._ 
+tend to sell at approximately the same price at the point labeled "I." This would be the 
+price at which the PER CS are issued. This issue price must be below the redemption 
+price of the PERCS. More will be said later about how this price is determined.