590 Part V: Index Options and Futures 
The discussion in this chapter concentrates on the structured products that are 
listed and traded on the major stock exchanges. A broader array of products -
typically called exotic options - is traded over-the-counter. These can be very com­
plicated, especially with respect to currency and bond options. It is not our intent to 
discuss exotic options, although the approaches to valuing the structured products 
that are presented in this chapter can easily be applied to the overall valuation of 
many types of exotic products. Also, the comments at the end of the chapter regard­
ing where to find information about these products may prove useful for those seek­
ing further information about either listed structured products or exotic options. 
Part I: "Riskless" Ownership 
of a Stock or Index 
THE "STRUCTURE" OF A STRUCTURED PRODUCT 
At many of the major institutional banks and brokerages, people are employed who 
design structured products. They are often called financial engineers because they 
take existing financial products and build something new with them. The result is 
packaged as a fund of sorts (or a unit trust, perhaps), and shares are sold to the pub­
lic. Not only that, but the shares are then listed on the American or New York Stock 
Exchanges and can be traded just like any other stock. These attributes make the 
structured product a very desirable investment. An example will show how a generic 
index structured product might look. 
Example: Let's look at the structured index product to see how it might be designed 
and then how it might be sold to the public. Suppose that the designers believe there 
is demand for an index product that has these characteristics: 
1. This "index product" will be issued at a low price - say, $10 per share. 
2. The product will have a maturity date - say, seven years hence. 
3. The owner of these shares can redeem them at their maturity date for the 
greater of either a) $10 per share orb) the percentage appreciation of the 
S&P 500 index over that seven-year time period. That is, if the S&P doubles 
over the seven years, then the shares can be redeemed for double their issue 
price, or $20. 
Thus, this product has no price risk! The holder gets his $10 back in the worst 
case (except for credit risk, which will be addressed in a minute). 
Moreover, these shares will trade in the open market during the seven years, so 
that if the holder wants to exit at any time, he can do so. Perhaps the S&P has rallied