Gopter 32: Structured Products 597 
Cash value of SIS $10 + $10 x 1.15 x ($MID - 166.10) / 166.10 
where 
Guarantee price = $10 
Underlying index: S&P Midcap 400 ($MID) 
Striking price: 166.10 
Participation rate: 115% of the increase of $MID above 166.10 
SIS matured seven years later, on June 2, 2000. At the time of issuance, seven-year 
interest rates were about 5.5%, so the "money in the bank" formula shows that one 
could have made about 4.7 points on a $10 investment, just by utilizing risk-free gov­
ernment securities: 
Money in the bank= 10 x e0-055 x 7 = 14.70 
We can't simply say that the cost of the imbedded call was 4. 7 points, though, because 
the participation rate is not 100% - it's greater. So we need to find out the Final Value 
of $MID that results in the cash value being equal to the "money in the bank" result. 
Using the cash value formula and inserting all the terms except the final value of 
$MID, we have the following equation. Note: $MIDMIB stands for the value of $MID 
that results in the "money in the bank" cash value, as computed above. 
14.70 = 10 + 10 X 1.15 X ($MIDMIB 166.10) I 166.10 
Solving for $MIDMIB' we get a value of 233.98. Now, convert this to a percent 
gain of the striking price: 
Imbedded call price = 233.98 I 166.10 - 1 = 0.4087 
Hence, the imbedded call costs 40.87% of the guarantee price. In this example, 
where the guarantee price was $10, that means the imbedded call cost $4.087. 
Thus, a more generalized formula for the value of the imbedded call can be 
construed from this example. This formula only works, though, where the participa­
tion rate is a fixed percentage of the strike price. 
Imbedded call value= Guarantee price x (Final Index ValueMIB / Striking Price - 1) 
Final Index ValueMIB is the final index price that results in the cash value 
being equal to the "money in the bank" calculation, where 
Money in the bank = Guarantee Price x ert 
r = risk-free interest rate 
t = time to maturity 
Thus, the calculated value of the imbedded call was approximately 4.087 points, 
which is an implied volatility of just over 26%. At the time, listed short-term options