Jim, It reminds me of a certain bank's "collar" products. Wealthy clients with very low cost stock hate the idea of paying capital gains taxes and hate more the idea of watching their stock decline in value. So, this bank sells collars to them to make the stock stay at the same effective price for years. The collars are European, so there can be no early exercise. The clients buy into this crap, not realizing that they have tied up their stock for 3, 5 or 10 years at no return, and, sometimes, at no return minus a high fee.
Is it guaranteed? Of course not, says the bank. But, as long as the stock remains within probable price parameters, there should be no problem. The parameters are set using the Black-Scholes Model, which was of such great value to Long Term Capital.
Meanwhile, the bank is selling at the money calls and buying at the money puts on the market, doing what is called a forward conversion. This strategy produces a money market type of return. Where do those profits go? To the client? You've gotta be kidding. <G> |
