610 Part V: Index Options and Futures 
The first thing one should do is to convert the striking price into an equivalent 
price for the underlying index, so that he can see where the higher striking price is 
in relation to the index price. In this example, the higher striking price when stated 
in terms of the structured product is 2.5 times the base price. So the higher striking 
price, in index terms, would be 2.5 times the striking price, or 375: 
Index call price = ( Call price / Base price) x Striking price 
= (25 I 10) X 150 
= 375 
Hence, if the Internet index rose above 375, the call feature would be "in effect" 
(i.e., the written call would be in-the-money). The value at which we can expect the 
structured product to trade, at maturity, would be equal to the base price plus the 
value of the bull spread with strikes of 10 and 25. 
Valuing the Bull Spread. Just as the single-strike structured products have 
an imbedded call option in them, whose cost can be inferred, so do double-strike 
structured products. The same line of analysis leads to the following: 
"Theoretical" cash value = 10 + Value of bull spread - Cost of carry 
Cost of carry refers to the cost of carry of the base price (10 in this example). 
By using an option model and employing knowledge of bull spreads, one can 
calculate a theoretical value for the structured product at any time during its life. 
Moreover, one can decide whether it is cheap or expensive - factors that would lead 
to a decision as to whether or not to buy. 
Example: Suppose that the Internet index is trading at a price of 210. What price can 
we expect the structured product to be trading at? The answer depends on how 
much time has passed. Let's assume that two years have passed since the inception 
of the structured product (so there are still five years of life remaining in the option). 
With the Internet index at 210, it is 40% above the structured product's lower 
striking price of 150. Thus, the equivalent price for the structured product would be 
14. Another way to compute this would be to use the cash value formula: 
Cash value= 10 x (210 / 150) = 14 
Now, we could use the Black-Scholes (or some other) model to evaluate the two 
calls - one with a striking price of 10 and the other with a striking price of 25. Using 
a volatility estimate of 50%, and assuming the underlying is at 14, the two calls are 
roughly valued as follows: 
Underlying price: 14