I’m preparing for equity derivatives and have met with some difficulty, so I need some help on the following question, thanks!
Please analyze the following share purchase plan. Assume client is committed to purchasing a fixed number of shares?
- Original payout : client receives the average of daily close prices over 10 periods
- Bank changes the payout such that bank has the right to choose to terminate the payout at any time from period 5 to period 10 a. Please explain why the following payout (2) has volatility exposure b. Bonus: if the client has a fixed dollar amount to spend, how does this affect the optionality? Client still receives the arithmetic average of daily prices until trade termination. If they don’t have enough cash they just get fewer shares than original target