38 lines
1.7 KiB
Plaintext
38 lines
1.7 KiB
Plaintext
624 Part V: Index Options and Futures
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FIGURE 32-6.
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PERCS price estimate versus common stock.
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44
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(I)
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iii 39 6 Months
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E
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~ w
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(I)
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u
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ct 34
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Cf)
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(.)
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a: w a.
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29
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0 1-.J. ____ ,__ ___ ...._ ___ _._ ___ __._ ___ _.__
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25 30 35 40
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Stock Price
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45 50
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First, consider the out-of-the-money situation. If the underlying common
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declines in price, the PERCS will not decline as fast because the additional dividends
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will provide yield support. The PER CS will therefore trade at a higher price than the
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common. Howeve1~ as the maturity date nears and the remaining number of addi
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tional dividends dwindles to a small amount, then the PER CS price and the common
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price will converge.
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The opposite effect occurs if the underlying common moves higher. The
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PERCS will trade at a lower price than the common when the common trades above
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the issue price. In fact, since there is a redemption price on the PERCS, it will not
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trade higher than the redemption price. The common, however, has no such restric
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tion, so it could continue to trade at prices significantly higher than the PERCS does.
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These points are illustrated in Figure 32-6, which contains the price curves of two
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PER CS: one at issuance, thus having three years remaining, and the other with just six
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months remaining until the maturity of the PERCS. For purposes of comparison, it
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was assumed that there is no sliding redemption feature involved. Several significant
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points can be made from the figure. First, notice that the PERCS and the common._
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tend to sell at approximately the same price at the point labeled "I." This would be the
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price at which the PER CS are issued. This issue price must be below the redemption
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price of the PERCS. More will be said later about how this price is determined. |