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.