Dual Directional Structured Products

Journal of Derivatives & Hedge Funds, Vol. 20, 99-112, 2014

17 Pages Posted: 11 May 2012 Last revised: 6 Nov 2016

See all articles by Geng Deng

Geng Deng

Wells Fargo

Tim Dulaney

Securities and Exchange Commission

Tim Husson

Securities and Exchange Commission

Craig J. McCann

Securities Litigation and Consulting Group

Date Written: May 8, 2012

Abstract

We analyze and value dual directional structured products -- or simply dual directionals (DDs). We find that DDs can be broadly organized into two categories: single observation dual directionals (SODDs) and knock-out dual directionals (KODDs). We determine the appropriate option decomposition for these categories and provide analytical formulas for their valuation. We confirm our analytic results using Monte Carlo simulation and use both techniques to value a large sample of DDs registered with the Securities and Exchange Commission prior to December 2012. Our results indicate that like many types of structured products, DDs tend to be priced at a significant premium to present value across issuers and underlying securities and that the present value of the decomposition is smaller than the face value net of commissions. We find that DDs with embedded leverage on upside returns of the underlying have a significantly lower average value than their unleveraged counterparts. We also find that the more frequently issued category of dual directionals (SODDs) have a significantly lower issue date valuation than their less common counterparts (KODDs).

Keywords: Structured Products, Straddle, Dual Directional, Valuation

JEL Classification: G12

Suggested Citation

Deng, Geng and Dulaney, Tim and Husson, Tim and McCann, Craig J., Dual Directional Structured Products (May 8, 2012). Journal of Derivatives & Hedge Funds, Vol. 20, 99-112, 2014. Available at SSRN: https://ssrn.com/abstract=2055229 or http://dx.doi.org/10.2139/ssrn.2055229

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Tim Dulaney (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NW
Washington, DC 20549-1105
United States

Tim Husson

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC Washington, DC 20549
United States
202-551-6803 (Phone)

Craig J. McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

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