37 lines
1.9 KiB
Plaintext
37 lines
1.9 KiB
Plaintext
Gapter 32: Structured Products
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XYZ Common: 30
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XYZ PERCS: 31
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XYZ January 40 LEAPS call: 2
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627
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If one buys this LEAPS call and holds it until maturity of the PERCS one year
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from now, the profit picture of the long PERCS plus long call position will be the fol
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lowing:
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Total Value
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XYZ Price in PERCS January 40 of long PERCS
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January Next Year Price LEAPS + long LEAPS
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25 25 0 25
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30 30 0 30
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35 35 0 35
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40 39 0 39
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45 39 5 44
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50 39 10 49
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Thus, the PE RCS + long call position is worth almost exactly what the common
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stock is after one year. The PERCS holder has regained his upside profit potential.
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What did it cost the investor to reacquire his upside? He paid out 2 points for
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the call, thereby more than negating his $1.50 dividend advantage over the course of
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the year (the common pays a $1 dividend;'the PERCS $2.50). Thus, it may not actu
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ally be worth the bother. In fact, notice that if the PERCS holder really wanted to
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reacquire his upside profit potential, he would have been better off selling his
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PERCS at 31 and buying the common at 30. If he had done this, he would have taken
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in 1 point from the sale and purchase, which is slightly smaller than the $1.50 divi
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dend he is forsaking. In either case, he must relinquish his dividend advantage and
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then some in order to reacquire his upside profit potential. This seems fair, however,
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for there must be some cost involved with reacquiring the upside.
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Remember that an arbitrageur might be able to find a trade involving these sit
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uations. He could buy a PERCS, sell the common short, and buy a listed call. If there
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were price discrepancies, he could profit. It is actions such as these that are required
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to keep prices in their proper relationship.
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1
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CHANGING THE REDEMPTION PRICE OF THE PERCS
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When covered writing was discussed as a strategy, it was shown that the writer may
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want to buy back the call that was written and sell another one at a different strike. |