35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
596 Part V: Index Options and Futures
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asset value. Eventually, upon maturity, the actual price will be the cash surrender
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value price; so if you bought the product at a discount, you would benefit, providing
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you held all the way to maturity.
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Example: Assume that two years ago, a structured product was issued with an initial
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offering price of $10 and a strike price of 1,245.27, based upon the S&P 500 index.
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Since issuance, the S&P 500 index has risen to 1,522.00. That is an increase of
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22.22% for the S&P 500, so the structured product has a theoretical cash surrender
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value of 12.22. I say "theoretical" because that value cannot actually be realized, since
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the structured product is not exercisable at the current time - five years prior to
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maturity.
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In the real marketplace, this particular structured product might be trading at
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a price of 11. 75 or so. That is, it is trading at a discount to its theoretical cash sur
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render value. This is a fairly common occurrence, both for structured products and
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for closed-end mutual funds. If the discount were large enough, it should serve to
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attract buyers, for if they were to hold to maturity, they would make an extra 4 7 cents
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(the amount of this discount) from their purchase. That's 4% (0.47 divided by 11.75
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= 4%) over five years, which is nothing great, but it's something.
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Why does the product trade at a discount? Because of supply and demand. It is
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free to trade at any price - premium or discount - because there is nothing to keep
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it fixed at the theoretical cash surrender value. If there is excess demand or supply in
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the open market, then the price of the structured product will fluctuate to reflect that
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excess. Eventually, of course, the discount will disappear, but five years prior to
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maturity, one will often find that the product differs from its theoretical value by
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somewhat significant amounts. If the discount is large enough, it will attract buyers;
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alternatively, if there should be a large premium, that should attract sellers.
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SIS
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One of the first structured products of this type that came to my attention was one
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that traded on the AMEX, entitled "Stock Index return Security" or SIS. It also trad
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ed under the symbol SIS. The product was issued in 1993 and matured in 2000, so
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we have a complete history of its movements. The terms were as follows: The under
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lying index was the S&P Midcap 400 index (symbol: $MID). Issued in June 1993, the
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original issue price was $10, and $MID was trading at 166.10 on the day of issuance,
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so that was the striking price. Moreover, buyers were entitled to 115% of the appre
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ciation of $MID above the strike price. Thus, the cash value formula was: |