Example:
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A U.S. pension fund owns $50 million
of the Italy 6.875% of 9/23/2023. It is fundamentally bullish
on Italy but is concerned about short-term spread widening in
the Italian markets due to upcoming elections.
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| • |
The pension fund buys $50 million of a spread
option on the Italy 6.875% of 9/2023 vs. the UST 6.875% of 8/15/2025.
The bond is currently trading at 1.10% spread to the UST.
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| • |
The investor pays 0.60% upfront for a European
style option with a spread strike of 1.10%, exercisable in 3
months.
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| • |
If the option is in-the-money, the investor will
be paid according to the following formula above.
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| • |
For 0.60% upfront (or 0.06% per annum for the
life of the bond) the pension fund has hedged its exposure to
widening of Italian spreads beyond 1.10% for three months. |
This material is being provided for informational
purposes only and should not be regarded as an offer to sell or a
solicitation of an offer to buy any product. Structured products are
not appropriate for all investors. Clients are advised to make an
independent review and reach their own conclusions regarding the economic
risks and benefits of any structured transaction and the legal, credit,
tax, accounting and other aspects of such transaction in relation
to their particular circumstances. The examples provided are based
on certain assumptions that may or may not reflect all potential variables
that could effect the value of a structured product. This information
has been obtained from various sources. Lehman Brothers does not warrant
the accuracy, completeness, timeliness, reliability, fitness for a
particular purpose or merchantability of this information. |
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