1011171-Cor-12

1011171-Cor-12 - EquityDerivatives andRelatedProducts...

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Equity Derivatives  and Related Products Class 12: Exotic Options Mark Zurack November 23, 2010
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1002220-MBA-11 2 Class Objectives Show how non-callable Convertibles are valued Introduce Exotic Derivatives to the class For each product reviewed, discuss the payoff of the derivative and in  some cases compare its benefits and risks to comparable “plain vanilla”  options Compare the returns of a series of Exotic Structured notes vs. a Plain  Vanilla Note 1011171-Cor-12
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1002220-MBA-11 3 Exotic Equity Derivatives Type Path-Dependent  Derivatives Correlation Derivatives Volatility  Derivatives Other Definition Payoff not only  depends on the  underlyer’s value at  expiration but how  it gets there Payoff depends on  how two risky assets  move Payoff depends  directly on the  volatility of the  underlyer Products Barrier Options Lookback Options Average Rate  (Asian) Options Cliquet Options Relative Performance  Options Guaranteed  Exchange Rate or  Quantos Options Rainbow Options Best-of and Worst-of  Options Himalayan Options Volatility Swaps Variance Swaps VIX Futures Binary or Digital  Options (payout  fixed if the  option expires  in-the-money) 1011171-Cor-12
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1002220-MBA-11 4 Path Dependent Derivatives – Barrier Options Option payoff depends not only on whether the option expires in-the- money, but also on whether the price of the underlying stock ever  crosses a predetermined level or barrier during the life of the option There are two main types of barrier options:  knock-in options  and  knock-out options knock-in option  will only pay off if the underlying asset finishes  in-the-money and the barrier is crossed at some time prior to  expiration knock-out option  will only pay off if the underlying asset is in- the-money at expiration and never crosses the barrier during the  life of the contract.  As soon as the underlying asset crosses the  barrier, the option is “knocked out” and expires worthless Some Knock-out options have  rebates  which entitle the holder to  a payment should the option knock out What They Are Benefits/ Risks Benefits Risks Costs less than  conventional options Knock-in and knock-out features  reduce the probability of exercise 1011171-Cor-12
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1002220-MBA-11 5 AAPL Structured Note With an  Exotic Feature Investor receives a 16.25% per annum coupon Principal return if AAPL does not fall 30% during the next twelve months Investor receives AAPL stock at today’s price if 30% decline occurs Features A bond combined with the sale of a put that is at-the-money but does not knock  in until AAPL declines 30% any time during the 12-month period
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This note was uploaded on 01/25/2011 for the course NBA 6940 at Cornell.

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1011171-Cor-12 - EquityDerivatives andRelatedProducts...

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