Topic
Structured note
About: Structured note is a research topic. Over the lifetime, 36 publications have been published within this topic receiving 2522 citations.
Papers
TL;DR: In this article, a new methodology for pricing and hedging derivative securities involving credit risk is proposed, based on the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate.
Abstract: This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a "spot exchange rate." Arbitrage-free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps. THE PURPOSE OF THIS article is to provide a new theory for pricing and hedging derivative securities involving credit risk. Two sources of credit risk are identified and analyzed. The first is where the asset underlying the derivative security may default, paying off less than promised. This is the case, for example, with imbedded options on corporate debt. The second is the credit risk introduced by the writer of the derivative security, who may also default. Examples include over-the-counter writers of options on Eurodollar futures, swaps, and swaptions. For pricing derivative securities involving credit risk, there are currently two approaches. The first views these derivatives as contingent claims not on the financial securities themselves, but as "compound options" on the assets underlying the financial securities. This is the case, for example, with the pricing of imbedded options on corporate debt (see Merton (1974, 1977), Black and Cox (1976), Ho and Singer (1982), Chance (1990), and Kim, Ramaswamy, and Sundaresan (1993)) or the pricing of vulnerable options (see Johnson and Stulz (1987)). In practice, however, this valuation methodology is difficult to use. First, the assets underlying the financial security are often not tradeable and therefore their values are not observable. This makes application of the theory and estimation of the relevant parameters problematic. Second, as in the case of corporate debt, all of the other liabilities of the firm senior to the corporate debt must first (and simultaneously) be valued. This generates significant computational difficulties. As a result, this approach has not
2,136 citations
TL;DR: In this article, the authors argue that the original issue discount rules should not be expanded beyond their current scope and that the current accrual requirement is inconsistent with the realization requirement.
Abstract: This paper considers whether the original issue discount rules, which require current taxation of interest income regardless of whether it is paid, should be expanded to cover derivative financial instruments. The original issue discount rules were recently expanded to debt instruments with contingent payments (so-called "structured notes"), and commentators have advocated using similar principles to expand the rules to other derivatives. The paper argues that the original issue discount rules should not be expanded beyond their current scope. The current accrual requirement is inconsistent with the realization requirement, and expansion of the current accrual requirement merely moves the place where the rules are inconsistent. Expansion of the original issue discount rules cannot eliminate or even reduce the inconsistency in the law. Using a theory of the most efficient place to draw lines between inconsistent tax rules, the paper argues that current law is superior to an expansion of the original issue discount rules.
277 citations
Patent•
1 Jul 2003
TL;DR: In this article, a structured note is structured to provide customized equity returns/exposure, and payment obligations may be related to the performance of an objective valuation, but structured note holders will depend on the good credit of the obligor for payment.
Abstract: The present invention relates to synthetic funds for purchase by investors. A structured note is structured to provide customized equity returns/exposure. Terms of each structured note may be specified by the purchaser and the structured notes may be unsecured liabilities of the obligor, e.g., there are no underlying assets upon which the structure note is based. Thus, there will be no limits on the use of structured note proceeds and management of assets and liabilities will be left entirely to the obligor's discretion. Structured note payment obligations may be related to the performance of an objective valuation, but structured note holders will depend on the good credit of the obligor for payment.
82 citations
Book•
15 Dec 2000
TL;DR: The Market for Structured Notes as mentioned in this paper has been a hot topic in the last few years, especially in the area of tax and accounting for structured note transactions, which has attracted a lot of attention.
Abstract: Preface. About the Author. About the Contributors. Introduction. Callable Bonds (1): Concept, Valuation, and Applications. Callable Bonds (2): Extensions, Variations, and Markets. Interest Rate - linked Notes. Constant Maturity Treasury and Swap Rate Notes. Index Amortizing Notes and Related Derivatives. Currency - linked Structured Notes. Commodity - linked Notes. Equity - linked Notes (1): Convertible Debt and Debt - with - equity Warrant Issues. Equity - linked Notes (2): Structural Variations. Equity - linked Notes (3): Equity Index - linked Issues. Credit - linked Notes. Exotic Option - Embedded Structured Notes. Inflation - indexed Notes and Related Derivatives. Insurance - linked Notes and Derivatives. Pricing and Valuation of Structured Note Transactions. Taxation and Accounting for Structured Notes. The Market for Structured Notes. Index.
34 citations
Patent•
24 Mar 2000
TL;DR: In this paper, a unitary investment instrument combining a swap and a structured note is presented, where the structured note provides its own portfolio exposures as well as serving as collateral for the base benchmark portfolio.
Abstract: A unitary investment instrument (20) combining a swap and a structured note, both of which provide multiple utilization of capital. The unitary instrument has three structured note component. An investor invests in the issuer the principal amount (26) of the structured note component. The structured note provides its own portfolio exposures as well as serving as collateral for the base benchmark portfolio (24) swap (alternatively, the base benchmark portfolio exposure (24) can be acquired through a separate collateral deposit on the investor's own portfolio). The first component is a benchmark portfolio, which in one preferred embodiment is a financial or stock index such as the S & P 500 Stock Index. The second component is an incremental benchmark portfolio keyed to the same benchmark index and the third component is keyed to a passive commodity index, having long and short positions (30), which in one preferred embodiment is the Mount Lucas Management Commodity Index (25).
29 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2021 | 1 |
| 2018 | 1 |
| 2017 | 1 |
| 2016 | 1 |
| 2014 | 5 |
| 2013 | 1 |