594 Part V: Index Options and Futures 
Cash Surrender Value = $10 x Final Value/ 1,245.27 
This shortened version of the formula only works, though, when the participa­
tion rate is 100% of the increase in the Final Index Value above the striking price. 
Otherwise, the longer formula should be used. 
Not all structured products of this type offer the holder 100% of the appreci­
ation of the index over the initial striking price. In some cases, the percentage is 
smaller ( although in the early days of issuance, some products offered a percentage 
appreciation that was actually greater than 100%). After 1996, options in general 
became more expensive as the volatility of the stock market increased tremendous­
ly. Thus, structured products issued after 1997 or 1998 tend to include an "annual 
adjustment factor." Adjustment factors are discussed later in the chapter. 
Therefore, a more general formula for Cash Surrender Value - one that applies 
when the participation rate is a fixed percentage of the striking price - is: 
Cash Surrender Value = 
Guarantee + Guarantee x Participation Rate x (Final Index Value/ Striking Price - I) 
THE COST OF THE IMBEDDED CALL OPTION 
Few structured products pay dividends. 1 Thus, the "cost" of owning one of these 
products is the interest lost by not having your money in the bank ( or money market 
fund), but rather having it tied up in holding the structured product. 
Continuing with the preceding example, suppose that you had put the $10 in 
the bank instead of buying a structured product with it. Let's further assume that the 
money in the bank earns 5% interest, compounded continuously. At the end of seven 
years, compounded continuously, the $10 would be worth: 
Money in the bank = Guarantee Price x ert 
= $10 x e 0-05 x 7 = 14.191, in this case 
This calculation usually raises some eyebrows. Even compounded annually, the 
amount is 14.07. You would make roughly 40% (without considering taxes) just by 
1Some do pay dividends, though. A structured product existed on a contrived index, called the Dow-Jones 
Top 10 Yield index (symbol: $XMT). This is a sort of "dogs of the Dow" index. Since part of the reason for owning a 
"dogs of the Dow" product is that dividends are part of the performance, the creators of the structured product 
(Merrill Lynch) stated that the minimum price one would receive at maturity would be 12.40, not the 10 that was 
the initial offering price. Thus, this particular structured product had a "dividend" built into it in the form of an ele­
vated minimum price at maturity.