Lecture_28 - Lecture 28 I. How to price a structured...

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Lecture 28 I. How to price a structured product. - Replicate the dynamic strategy used to compute the final settlement value. - The current price often depends on future values of an underlying index or implied volatility. Example: DGD Merrill Lynch Accel Return Bear Market Notes DJ Industrial Average due 9/5/2008 Ticker Symbol: DGD CUSIP: 59022W737 Exchange: AMEX Security Type: Special Product - Index Based SECURITY DESCRIPTION: Merrill Lynch & Co. Inc., Accelerated Return Bear Market Notes linked to the Dow Jones Industrial Average, due 9/5/2008, and issued at $10 per unit. These notes are designed for investors who believe that the Dow Jones Industrial Average will decline over the period of the notes. The notes will receive no payments before maturity, are not redeemable prior to maturity, and make no guarantee of the return of principal at maturity. At maturity the holder will receive a payment based on the percentage change in the Dow Jones Industrial Average, starting value 13,427.70 as of 6/27/2007. If the Average has decreased, the maturity payment will be based on five times the percentage decrease in the Average, not to exceed $12.20 per unit. If the Average has increased, the holder will receive a maturity payment that is reduced from the $10 offering
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This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

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Lecture_28 - Lecture 28 I. How to price a structured...

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