Options in Structured Notes: Fix the Price or Fix the Spread?

55 Pages Posted: 10 Sep 2014

See all articles by John D. Finnerty

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

Douglas R. Emery

University of Miami - Department of Finance

Date Written: September 8, 2014

Abstract

We derive consistent contingent-claims models for valuing implicit options embedded in structured notes, and use them to compare the cost of fixing the spread with that of fixing the price in bond tender offers. We analyze 289 bond tender offers and find that the cost difference is economically significant in a substantial majority of cases. The cost difference and choice of method depend especially on whether the offer is for investment-grade or high-yield bonds. Other significant determinants of the choice of method include the percentage of issue sought, the inclusion of a consent solicitation, and a change-of-control.

Keywords: Embedded options, Bond tender offers, Investment-grade, High-yield, transactions costs

JEL Classification: G13, G32

Suggested Citation

Finnerty, John D. and Emery, Douglas R., Options in Structured Notes: Fix the Price or Fix the Spread? (September 8, 2014). Fordham University Schools of Business Research Paper No. 2493490. Available at SSRN: https://ssrn.com/abstract=2493490 or http://dx.doi.org/10.2139/ssrn.2493490

John D. Finnerty

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Douglas R. Emery (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-4362 (Phone)

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