Gapter 32: Structured Products 
XYZ Common: 30 
XYZ PERCS: 31 
XYZ January 40 LEAPS call: 2 
627 
If one buys this LEAPS call and holds it until maturity of the PERCS one year 
from now, the profit picture of the long PERCS plus long call position will be the fol­
lowing: 
Total Value 
XYZ Price in PERCS January 40 of long PERCS 
January Next Year Price LEAPS + long LEAPS 
25 25 0 25 
30 30 0 30 
35 35 0 35 
40 39 0 39 
45 39 5 44 
50 39 10 49 
Thus, the PE RCS + long call position is worth almost exactly what the common 
stock is after one year. The PERCS holder has regained his upside profit potential. 
What did it cost the investor to reacquire his upside? He paid out 2 points for 
the call, thereby more than negating his $1.50 dividend advantage over the course of 
the year (the common pays a $1 dividend;'the PERCS $2.50). Thus, it may not actu­
ally be worth the bother. In fact, notice that if the PERCS holder really wanted to 
reacquire his upside profit potential, he would have been better off selling his 
PERCS at 31 and buying the common at 30. If he had done this, he would have taken 
in 1 point from the sale and purchase, which is slightly smaller than the $1.50 divi­
dend he is forsaking. In either case, he must relinquish his dividend advantage and 
then some in order to reacquire his upside profit potential. This seems fair, however, 
for there must be some cost involved with reacquiring the upside. 
Remember that an arbitrageur might be able to find a trade involving these sit­
uations. He could buy a PERCS, sell the common short, and buy a listed call. If there 
were price discrepancies, he could profit. It is actions such as these that are required 
to keep prices in their proper relationship. 
1 
CHANGING THE REDEMPTION PRICE OF THE PERCS 
When covered writing was discussed as a strategy, it was shown that the writer may 
want to buy back the call that was written and sell another one at a different strike.