What should be the right pricing strategy for Nikkei Put Warrants (NPWs)?
Structure of Nikkei-Linked Euro-Yen Transactions
The European bank sold a bond that promised to make annual interest payments in yen at a fixed interest rate. However, through a set of swaps, the issuer transformed its annual fixed-rate yen payments into dollar-denominated LIBOR-bases payments. This is represented by the left side transaction of the above figure.
At maturity, the issuer would redeem the bonds from the investor at a price tied to the Nikkei. If the Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds. Thus, it would be as if the issuer sold bonds with the final principal payments at par but also bought a put option on the Nikkei maturing in the same year as the bond. If the Nikkei fell, the put would rise in value benefiting the issuer. This reflects the embedded nature of the put option.
The issuer had no interest in holding this put. It often resold the embedded put options to financial intermediaries like Goldman Sachs by promising to deliver, at maturity, the difference between the bond’s par value and its Nikkei-linked redemption price. In exchange for promising to make this payment, which equaled the intrinsic value of the embedded put, the bond issuer would be paid an up-front put premium. This is represented by the right side transaction in the above figure.
Goldman Sachs then could sell these puts to institutional customers. Not all of these puts were sold to institutional customers. As of December 1989, Goldman Sachs had a significant inventory of European-style puts on Nikkei and it was offsetting the risk on these puts through the futures offered by Singapore, Tokyo and Osaka stock exchanges. The sales force of Goldman Sachs gave extremely positive feedback on the embedded put options and it was decided that exchange-traded put warrants would be a good product offering from the company’s point of view.
Role of Kingdom of Denmark
Goldman Sachs was a private partnership and non-SEC registrant and hence could not issue the warrants publicly without making material public disclosures. Therefore it was necessary for it to work with an issuer registered with the SEC. The issuer would sell the warrants to the public but simultaneously enter into a private contract with Goldman Sachs that exactly offset the obligation under the warranty contract. In return, it would receive a fee from Goldman Sachs without effectively having any exposure to Nikkei. In addition to the above argument, the issuer should be a highly creditworthy and non-US sovereign entity due to adverse reporting implications for a US corporate issuer. Based on the above criteria, Goldman Sachs entered into an agreement with the Kingdom of Denmark, which would get a fee of $1. 3 million from these transactions. Risks exposure for Goldman Sachs
Risk of bearing the unsold inventory of NPWs
If the investors find prices too high then much of the inventory would remain unsold and GS will have to bear the costs of unsold warrants.
GS would offset its risk through a futures position in the Nikkei offered by the Singapore, Osaka & Tokyo stock exchanges.
Exchange Rate Risks
Considering the preference of U. S investors, GS would bear the exchange rate risks for its investors. This implies that GS has to sell NPWs in terms of dollars whereas the same has been purchased by it in terms of yen. Also, in the 1980s, the Nikkei and the yen/dollar exchange rate were moving in opposite directions which further increased its exposure to exchange rate risk.
This can be mitigated through Quantos, a product offered by its currency and commodity division. A complete hedge would cost GS about $1 per warrant whereas hedging 80% of its risk would cost it $0. 50 per warrant only 3. Repute at risk GS would not like to keep the prices very low. At the same time, it cannot price them very high as there is a risk that competitors might copy the product and start selling it at lower prices. Also, if NPWs started trading at lower prices in the secondary market this would bring disrepute for the organization and its partners involved.
Price Calculation Assumptions
Securities are traded continuously
Zero transactions costs
The risk free rate is constant and it is possible to borrow and lend infinitely at this rate Variables for put intrinsic value calculation
S0= Nikkei index = 38586. 16
Exercise price = 38587. 68
q = dividend yield = 0. 49%
Risk-free rate = 5. 85% • T = time to maturity = 3 years
Based on the above inputs, the price of the American option is 1852. 9 yens which is $2. 57. When the cost of hedging is added, this becomes $3. 57. Fixed Costs Fee for the Kingdom of Denmark: $ 1300000 Legal and listing fee: $ 350000 Commissions: $ 3000000 Costs of R&D: $ 1250000 Total: $5900000 Cost per NPW: $0. 621 Total fixed plus variable: $4. 191 Hence, this is the minimum price Goldman Sachs can charge for NPWs.
Why Choose Instant Nursing Papers?
Quality Nursing Papers
We assist students in achieving the best top-grade in their nursing papers, and in compliance with the provided instructions. Have your nursing paper written with a certified specialist Ph.D., Bachelor's, and Master's graduates with many years of experience in academic writing.
Experts with Ph.d., MDs and DNP Holders
Our writers have acquired Ph.D., MDs and DNP credentials from world class institutions. Our writers can handle papers from any discipline and can handle over 100+ subjects.
Nursing Papers Cheap
We provide a great deal of student-friendly prices and professionalism with all our nursing essay writing services. Our paper writing services have a user-friendly interface and professional nursing academic assistance. We are committed to assisting all students with their nursing assignments and projects regardless of their academic level.
Fast Paper Delivery
Our writers follow a strict schedule to ensure papers are delivered before the deadline to enable our editors to proofread before the final delivery to our customers. We strictly observe the early delivery of assignments to meet our clients' deadlines.
Plagiarism-free Nursing Papers
Our expert nursing paper writers are dedicated to conducting thorough research and writing papers from scratch to deliver original papers. To avoid paper plagiarism, all orders go through steps of writing, editing, and proofreading.
24Hour Customer Help
Our customer support is available 24/7/365 to help clients and make their paper writing services easy to use. Our experienced support team is available to answer your queries any time, 24 hours a day.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our Nursing Papers Writing Service
We provide Nursing Assignment Services to Nursing students. Also, we are not limited to providing Nursing assignment help to students only. We also provide assignment help and solutions to community health nursing, Anatomy & Physiology, Microbiology, Biochemistry and Biophysics, and Nutrition & Dietetics.
Sit back, relax while our writers sort you out on your most daunting nursing essay queries on how to write a good nursing essay. We got you if you are looking for the best nursing essay services.
It is no doubt that qualifying for a nursing career is difficult and requires a series of tests. Most nursing students must put in a lot of work in their assignments and coursework. Instantnursingpapers.com will help you answer queries such as “who can write my nursing research paper?”.
Nursing Dissertation Help
Instantnursingpapers.com will save you the hustle of undergoing pressure or even depression while doing your nursing dissertation paper. Save yourself from all the long sleepless nights and pressure by working with our best nursing dissertation writing professionals.
Nursing Coursework Help
If you happen to hop into our site in search of nursing coursework help, look no further. We are the number one solution for the best nursing coursework assignments. Therefore, to complete the best APA nursing coursework, seek help from professional nursing coursework experts at instantnursingpapers.com