35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
590 Part V: Index Options and Futures
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The discussion in this chapter concentrates on the structured products that are
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listed and traded on the major stock exchanges. A broader array of products -
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typically called exotic options - is traded over-the-counter. These can be very com
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plicated, especially with respect to currency and bond options. It is not our intent to
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discuss exotic options, although the approaches to valuing the structured products
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that are presented in this chapter can easily be applied to the overall valuation of
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many types of exotic products. Also, the comments at the end of the chapter regard
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ing where to find information about these products may prove useful for those seek
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ing further information about either listed structured products or exotic options.
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Part I: "Riskless" Ownership
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of a Stock or Index
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THE "STRUCTURE" OF A STRUCTURED PRODUCT
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At many of the major institutional banks and brokerages, people are employed who
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design structured products. They are often called financial engineers because they
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take existing financial products and build something new with them. The result is
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packaged as a fund of sorts (or a unit trust, perhaps), and shares are sold to the pub
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lic. Not only that, but the shares are then listed on the American or New York Stock
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Exchanges and can be traded just like any other stock. These attributes make the
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structured product a very desirable investment. An example will show how a generic
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index structured product might look.
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Example: Let's look at the structured index product to see how it might be designed
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and then how it might be sold to the public. Suppose that the designers believe there
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is demand for an index product that has these characteristics:
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1. This "index product" will be issued at a low price - say, $10 per share.
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2. The product will have a maturity date - say, seven years hence.
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3. The owner of these shares can redeem them at their maturity date for the
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greater of either a) $10 per share orb) the percentage appreciation of the
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S&P 500 index over that seven-year time period. That is, if the S&P doubles
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over the seven years, then the shares can be redeemed for double their issue
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price, or $20.
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Thus, this product has no price risk! The holder gets his $10 back in the worst
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case (except for credit risk, which will be addressed in a minute).
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Moreover, these shares will trade in the open market during the seven years, so
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that if the holder wants to exit at any time, he can do so. Perhaps the S&P has rallied |