Steven: Think of this PERQS in this way...
MSDW has essentially given you a piece of paper which is a 6% 2-year CD. However, what you get back in the end in cash is dependent on AMAT stock price, not to exceed $70.40 - so it is not really a CD investment, but can look like one from MSDW's perspective.
What does MSDW do with all the money they collect from this paper? One thing to do is buy AMAT stock, and it becomes a riskless proposition for them if AMAT hits $76.14 in two years ($70.40 + 2x$2.37), and profitable if above that. Otherwise, the risk is simply the 6% they are paying out. They are probably bringing to bear other financing and hedging vehicles to cover that 6% risk to make it profitable as well. The first year "adjustment" should be viewed as nothing more than a way for MSDW to control that risk.
This PERQS will be publicly traded, so that you can buy and sell within the two year window. It will move with, but not exactly like, AMAT stock.
From an investor perspective, you are buying AMAT stock with a 6% dividend. Has all the price risk, but caps the profit. It is actually best configured for those mutual funds which want the "high growth" tech stock, but are limited to which stocks they invest in based on their investment category. For example, an "income equity" fund generally has to invest in stocks which generate a dividend. These funds are excluded from buying high grade tech stocks, since none of them generally pay a high enough dividend (MSFT, CSCO, AMAT, etc.)
Z |
