Abn Amro Reserve Exchangeable Securities Essay

705 Words Nov 29th, 2012 3 Pages
ABN AMRO reserve exchangeable securities

ABN AMRO bank is issuing Reverse Exchangeable Securities (RES) that are valued based on dell shares and mature in 1.5 years with a principal payoff that does not exceed the initial principal amount. Given in the case is that the current price of a Dell share is $25.72. If an investor would like to invest $1000, the investor would be able to own 38.88 ($1000/$25.72) shares of Dell. The coupon rate is semi annually paid at 12%. The investors payment structure could be defines as $60, $60, $60+final payment. But because it is not a bond the final payment is will not be equal to $1,000. Instead the final payment is linked to the price of Dell shares, 1.5 years from now (P1.5). It is stated that if
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However, it the bond is actually over priced at $1,000. So the difference i.e., $97.44 is the profit earned by ABN AMRO bank. A profit of 9.74% for every $1000 investment is quite high. If ABN AMRO bank is not gaining any profit, it will result in a volatility of 28%, which is very low. So the bond part is less risky than the bond sold in the market because of the more guaranteed principal payment. Thus the only viable reason why investors will invest in this product will be due to incomplete market information. But as there’s no market for individual investors to short selling put options to other institutions. Thus with ABN AMRO bank investors could get them the needed market through the purchase of the RES which could let them sell their put options, increases the liquidity and efficiency of the market.
ABN AMRO bank would initiate such an investment opportunity as the volatility is high (in this case above 28%) to give them considerable profit margin, also such an investment product can effectively help them manage their cash flow. Simply because RES final payment to investors is positively correlated to Dell shares, Thus if Dell shares perform badly, ABN AMRO bank pays less whereas if Dell share price is high, ABN AMRO bank has higher payoff and investors will consider ABN AMRO to be doing well thus not highly affecting the cash

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