UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next
Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Re: Structured products? Date: 2/11/2013 8:12 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Just for the sake of argument, let’s take a look at the bet being offered. The underwriter seems to be betting that the Euro Stoxx 50 index is going down. Each month that it trades at less than 80% of its value when the structured product is rolled out, the buyer of a bond tied to the index would receive no monthly payment. Otherwise, he gets a monthly coupon (whose value is 7% ann. for the first five years).

There is an ETF that tracks the index, as well as options chains on that EFT, and probably futures for the index, as well as options on those futures contracts. So there’s lots of ways to recreate a “home brew” version of the bet. But let’s take the simplest case, that of making an unleveraged, directional bet on the underlying itself. And let’s benchmark the index (represented by FEZ) against a comparable US counterpart (such as SPY or DIA). http://finance.yahoo.com/echarts?s=FEZ+Interactive#symbol=fe...

Clearly, the EuroStoxx50 (aka, FEZ) is more volatile than DIA or SPY, which means it’s more tradable. So let’s drop down to a shorter time frame. http://finance.yahoo.com/echarts?s=FEZ+Interactive#symbol=fe... If the would-be buyer of the bond had done nothing more than go long on a cross of Price over a 20-period SMA, he/she could have pulled in 14%, right? or twice the yearly coupon. Similar money could have been made going short. http://finance.yahoo.com/echarts?s=FEZ+Interactive#symbol=fe... If those bets had been leveraged (through options, futures, or options on futures), then even better money could have been made *provided* the bets had gotten both the direction *and* the timing correct. But isn’t that also true for the bond buyer? He/she has to get the direction and timing correct, or else they’ve merely made an interest-free loan to the bond issuers.

If you buy the structured product, you think you are excused from doing your homework. But you can bet that your counter-party has done theirs, and you can bet that you will lose any bet you make with a more well-informed counter-party. However, da, da, you could become your own counter-party by putting together a set of trading rules that would have as its goal a minimum return of 7% per year. And having built that tool, you could apply it more widely than to just the single index.

That’s why buying ready-made products is so harmful. It induces laziness and sloppy thinking. You become so bedazzled by the upsides that you forget about the downsides. But if you make the effort to see how/where they intend to profit and do a knock-off, then you gain both knowledge and, possibly, some fat profits.
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Saul's Investing Discussions

Why Did I Buy a Bunch of PFIE Today?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement