Create a 4 page essay paper that discusses Synthetic Financial Products.Note that an increase from 1 to 2 is 100 per cent increase, from 1 to 3 a 200 percent increase, and so on. Therefore, a 300 per

Create a 4 page essay paper that discusses Synthetic Financial Products.

Note that an increase from 1 to 2 is 100 per cent increase, from 1 to 3 a 200 percent increase, and so on. Therefore, a 300 per cent cap would be a rise from 1 to 4 (in case of an index, from 100 to 400.)

Analysis: Where So is less than St is less than 400 [initial index value times performance cap 300%].

Here the initial index value has to be 1.333 in order for the performance cap to be 300, per problem statement, considering that η has to be 300, in order to yield 400.[300 x 1.33 = 400]

Analysis: Based on the ELN theory, the Face value or principal of the investment -- here $1,000,000 – has to be reduced to its present value (PV), and the difference between the present value figure and the Face amount is the amount available for exposure in the equity index options market. The present value of the amount is held either in a zero coupon bond or another risk-free investment vehicle such as a savings account earnings a fixed return.

At 5%, the amount of $216,301 is available to be invested in European call options, as required by the problem. . European options can be exercised only at the end of their contract life, unlike American options which can be exercised at any time prior to expiration date to take advantage of a profitable situation. While the problem statement states otherwise, ELN theory says that only long call options are used, as short positions - - the writing of call options -- is not consistent with the theory.

It should also be noted that most index options are American options, and the restriction in favor of European options limits the investor’s decision choices. It is therefore suggested that the writing of options be dispensed with as unnecessary to the ELN concept.

Information provided by an annual Dun and Bradstreet publication indicates that the index options market is a cheap way of obtaining an opportunity to profit from the movement of an index such as the OEX