Post by Sapphire Capital on Jul 16, 2008 6:24:34 GMT 4
Endless Leverage Certificates
SILVIA ROSSETTO
University of Warwick - Finance Group
JOS VAN BOMMEL
University of Oxford - Said Business School January 2008
Abstract:
An Endless Leverage Certificate is a novel structured product that has become very popular among European retail investors. ELC-holders have the right to claim the difference between the value of underlying and a contractual financing level at any time during the unlimited life of the contract. Because the financing level increases at a predetermined rate, the contract can be interpreted as a plain vanilla levered position. ELCs have a contractual stoploss barrier, so that issuers can semi-statically hedge their positions by buying (or selling) the underlying. If they do, they are exposed to gap risk, the risk that the underlying precipitates through the barrier and the financing level. This may happen overnight, or due to large jumps. For a large sample of stock ELCs, we find that ELCs are overpriced by less than 1%, and that many ELC-investors exercise too late. We also find that average bid ask spreads are much smaller than on other derivatives. An intraday event study on stoploss terminations shows a pronounced increase in trading activity following stoploss events but a negligible price impact.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1101564
SILVIA ROSSETTO
University of Warwick - Finance Group
JOS VAN BOMMEL
University of Oxford - Said Business School January 2008
Abstract:
An Endless Leverage Certificate is a novel structured product that has become very popular among European retail investors. ELC-holders have the right to claim the difference between the value of underlying and a contractual financing level at any time during the unlimited life of the contract. Because the financing level increases at a predetermined rate, the contract can be interpreted as a plain vanilla levered position. ELCs have a contractual stoploss barrier, so that issuers can semi-statically hedge their positions by buying (or selling) the underlying. If they do, they are exposed to gap risk, the risk that the underlying precipitates through the barrier and the financing level. This may happen overnight, or due to large jumps. For a large sample of stock ELCs, we find that ELCs are overpriced by less than 1%, and that many ELC-investors exercise too late. We also find that average bid ask spreads are much smaller than on other derivatives. An intraday event study on stoploss terminations shows a pronounced increase in trading activity following stoploss events but a negligible price impact.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1101564