39 lines
1.8 KiB
Plaintext
39 lines
1.8 KiB
Plaintext
Cl,opter 32: Structured Products
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Option
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5-year call, strike = 10
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5-year call, strike = 25
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Theoretical Price
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7.30
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3.70
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611
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Thus, the value of the bull spread would be approximately 3.60 (7.30 minus
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3.70). The structured product would then be worth 13.60- the base price of 10, plus
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the value of the spread:
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"Theoretical" cash value= 10 + 3.60 - Cost of carry= 13.60 - Cost of carry
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It may seem strange to say that the value of the structured product is actually
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less than the cash value, but that is what the call feature does: It reduces the worth
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of the structured product to values below what the cash value formula would indi
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cate.
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Given this information, we can predict where the structured product would trade at
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any price or at any time prior to maturity. Let's look at a more extreme example, then,
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one in which the Internet index has a tremendously big run to the upside.
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Example: Suppose that the Internet index has risen to 525 with four years of life
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remaining until maturity of the structured product. This is well above the index
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equivalent call price of 375. Again, it is first necessary to translate the index price
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back to an equivalent price of the structured product, using either percentage gains
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or the cash value formula:
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Cash value = 10 x (525/ 150) = 35
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Again, using the Black-Scholes model, we can determine the following theo
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retical values:
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Underlying price: 35
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Option
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3-year c~strike = 10
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3-year call, strike = 25
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Theoretical Price
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25.50
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14.70
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Now, the value of the bull spread is 10.80 (25.50 minus 14.70). The deepest in
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the-money option is trading near parity, but the (written) option is only 10 points in
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the-money and thus has quite a bit of time value premium remaining, since there are
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three years of life left:
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"Theoretical" cash value = 10 + 10.80 = 20.80 - Cost of carry |