38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
609
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the products discussed earlier. However, in this case, there is a maximum that the
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c,1.,;h value can be worth: 20. In other words, there is a ceiling on the value of this
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1tructured product at maturity. It is exactly like a bull spread with two striking prices,
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one at 10 and one at 20. In reality, this structured product would have to be evaluat-
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using both striking prices. We'll get to that in a minute.
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There is another way that the underwriter sometimes states the terms of the
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structured product, but it is also a bull spread in effect. The prospectus might say
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something to the effect that the structured product is defined pretty much in the
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standard way, but that it is callable at a certain (higher) price on a certain date. In
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uther words, someone else can call your structured product away on that date. In
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effect, you have sold a call with a higher striking price against your structured prod
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Ut1:. Thus, you own an imbedded call via the usual purchase of the structured prod
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uct and you have written a call with a higher strike. That, again, is the definition of a
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bull spread.
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When analyzing a product such as this, one must be mindful that there are two
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calls to price, not only in determining the final value, but more importantly in deter
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mining where you might expect the structured product to trade during its life, prior
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to maturity. An option strategist knows that a bull spread doesn't widen out to its max
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imum profit potential when there is still a lot of time remaining before expiration,
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unless the underlying rises by a substantial amount in excess of the higher striking
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price of the spread. Thus, one would expect this type of structured product to behave
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in a similar manner.
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The example that will be used in the rest of this section is based on actual "bull
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spread" structured products of this type that trade in the open marketplace.
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Example: Suppose that a structured product is linked to the Internet index. The
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strike price, based on index values, is 150. If the Internet index is below 150 at matu
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rity, seven years hence, then the structured product will be worth a base value of 10.
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There is no adjustment factor, nor is there a participation rate factor. So far, this is
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just the same sort of definition that we've seen in the simpler examples presented
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previously. The final cash value formula would be simply stated as:
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Final cash value = 10 x (Final Internet index value/150)
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However, the prospectus also states that this structured product is callable at a
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price of 25 during the last month of its life.
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This call feature means that there is, in effect, a cap on the price of the under
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lying. In actual practice, the call feature may be for a longer or shorter period of time,
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and may be callable well in advance of maturity. Those factors merely determine the
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expiration date of the imbedded call that has been "written." |