620 
Stock price appreciation 139 - 35): 
Dividends over 3 years: 
Total gain 
Total return: 
Annualized return: 
Part V: Index Options and Future. 
4 
7.50 
11.50 
11.50/35 = 32.9% 
32.9%/3 = 11% 
If the PERCS were called at an earlier time, the annualized return might be ever 
higher. · 
CALL FEATURE 
The company will most likely call the PER CS if the common is above the call price 
for even a short period of time. The prospectus for the PERCS will describe any 
requirements regarding the call. A typical one might be that the common must close 
above the call price for five consecutive trading days. If it does, then the company 
may call the PERCS, although it does not have to. The decision to call or not is strict­
ly the company's. The PERCS holder has no choice in the matter of when or if his 
shares are called. This is the same situation in which the writer of a covered call finds 
himself: He cannot control when the exercise will occur, although there are often 
clues, including the disappearance of time value premium in the written listed call 
option. The PERCS holder is more in the dark, because he cannot actually see the 
separate price of the imbedded call within the PERCS. Still, as will be shown later, 
he may be able to use several clues to determine whether a call is imminent. 
Most PERCS may be called for either cash or common stock. This does not 
change the profitability from the strategist's standpoint. He either receives cash in 
the amount of the call price, or the same dollar amount of common stock. The only 
difference between the two is that, in order to completely close his position, he would 
have to sell out any common stock received via the call feature. If he had received 
cash instead, he wouldn't have to bother with this final stock transaction. 
In the case of most PERCS, the call feature is more complicated than that pre­
sented in the preceding example. Recall that the company that issued the PERCS 
can call it at any time during the three years, as long as the common is above the call 
price. The holder of the XYZ PERCS in the example would not be pleased to find 
that the PER CS was called before he had received any of the higher dividends that 
the PERCS pays. Therefore, in order to give a PERCS holder essentially the same 
return no matter when the PERCS is called, there is a "sliding scale" of call prices. -
At issuance, the call price will be the highest. Then it will drop to a slightly 
lower level after some of the dividends have been paid (perhaps after the first year).