28 lines
1.5 KiB
Plaintext
28 lines
1.5 KiB
Plaintext
612 Part V: Index Options and Futures
|
||
Hence, even though the Internet index is at 525 - far above the equivalent cal
|
||
price of 375 - the structured product is expected to be trading at a price well belo\\
|
||
its maximum price of 25.
|
||
Figure 32-5 shows the values over a broad spectrum of prices and for various
|
||
expiration dates. One can clearly see that the structured product will not trade"near
|
||
its maximum price of 25 until time shrinks to nearly the maturity date, or until the
|
||
underlying index rises to very high prices. In particular, note where the theoretical
|
||
values for the bull spread product lie when the index is at the higher striking price of
|
||
375 (there is a vertical line on the chart to aid in identifying those values). The struc
|
||
tured product is not worth 20 in any of the cases, and for longer times to maturity, it
|
||
isn't even worth 15. Thus, the call feature tends to dampen the upside profit poten
|
||
tial of this product in a dramatic manner.
|
||
The curves in Figure 32-5 were drawn with the assumption that volatility is
|
||
50%. Should volatility change materially during the life of the structured product,
|
||
then the values would change as well. A lower volatility would push the curves up
|
||
toward the "at maturity" line, while an increase in volatility would push the curves
|
||
down even further.
|
||
FIGURE 32-5.
|
||
Value of bull spread structured product.
|
||
At Maturity
|
||
25
|
||
1 Year Left
|
||
20 3Years Left
|
||
15
|
||
5
|
||
100 150 200 250 300 350 400 450 500 550 600
|
||
Price of Index |