37 lines
2.4 KiB
Plaintext
37 lines
2.4 KiB
Plaintext
600 Part V: Index Options and Futures
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Solving the following equation for $MID would give the desired answer:
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Cash Value = 13 = 10 + 11.5 x ($MID/166.l - 1)
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3 = 11.5 x $MID/ 166.1 - 11.5
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14.5 x 166.1 / 11.5 = $MID
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209.43 = $MID
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So, if $MID were at 209.43, the cash value would be 13 - the price the investor
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is currently paying for SIS. This is protection of 12.2% down from the current price
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of 238.54. That is, $MID could decline 12.2% at maturity, from the current price of
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238.54 to a price of 209.43, and the investor who bought SIS would break even
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because it would still have a cash value of 13.
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Of course, this discount could have been computed using the SIS prices of 13
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and 15.02 as well, but many investors prefer to view it in terms of the underlying
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index - especially if the underlying is a popular and often-cited index such as the S&P
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500 or Dow-Jones Industrials.
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From Figure 32-1, it is evident that the discount persisted throughout the
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entire life of the product, shrinking more or less linearly until expiration.
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SIS TRADING AT A DISCOUNT TO THE GUARANTEE PRICE
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In the previous example, the investor could have bought SIS at a discount to its cash
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value computation, but if the stock market had declined considerably, he would still
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have had exposure from his SIS purchase price of 13 down to the guarantee price of
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10. The discount would have mitigated his percentage loss when compared to the
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$MID index itself, but it would be a loss nevertheless.
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However, there are sometimes occasions when the structured product is trad
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ing at a discount not only to cash value, but also to the guarantee price. This situation
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occurred frequently in the early trading life of SIS. From Figure 32-1, you can see
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that in 1995 the cash value was near 11, but SIS was trading at a discount of more
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than 2 points. In other words, SIS was trading below its guarantee price, while the
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cash value was actually above the guarantee price. It is a "double bonus" for an
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investor when such a situation occurs.
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Example: In February 1995, the following prices existed:
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$MID: 177.59
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SIS: 8.75
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For a moment, set aside considerations of the cash value. If one were to buy SIS
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at 8. 75 and hold it for the 5.5 years remaining until maturity, he would make 1.25
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points on his 8.75 investment- a return of 14.3% for the 5.5-year holding period. As
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a compounded rate of interest, this is an annual compound return of 2.43%. |