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Barrier Options

Earlier this week we introduced binary options, a type of exotic derivative that is embedded in some retail structured products such as dual directionals. Today we're going to go over barrier options, which are another exotic option contract that happens to be embedded in one of the most popular types of structured products: reverse convertibles.

Like vanilla options, barrier options have a payoff that compares the final asset price to the strike price of the option. In addition, the payoff...

SLCG Research: Tenants-in-Common Interests

While we've spent a great deal of time talking about non-traded REITs on this blog, so far we've given less attention to another kind of real estate investment that has also been sold to investors based on questionable merits: tenants-in-common (TIC) interests. TICs are private placement investments that were very popular during the real estate boom of 2002-2008, but have suffered tremendously when the markets turned sour. We discussed TICs in our paper on non-traded REITs, but we felt that...

SEC Litigation Releases: Week in Review - January 11th, 2013

Court Orders New York-Based Hedge Fund Manager and Firm to Pay Nearly $5 Million in Disgorgement and Penalties
January 9, 2013, (Litigation Release No. 22588)
Final judgments were entered against hedge fund manager Chetan Kapur and his firm ThinkStrategy Capital Management for allegedly overstating the performance of their ThinkStrategy Capital Fund, "inflat[ing] the firm's assets, exaggerat[ing] the firm's longevity and performance history, and misrepresent[ing] the size and credentials of...

The Basics of Options Contracts

In a lot of our research work, we break down complex financial products into simpler pieces and then value those simple pieces one at a time. Often, those smaller components are options contracts (especially in our structured product work), which are relatively easy for practitioners to value. However, options contracts use a peculiar terminology that can be confusing to the uninitiated, so we thought we would lay out exactly what we mean when we talk about options.

Options contracts are...

SLCG Research: Dual Directional Structured Products [Update]

We have significantly updated our working paper on dual directional structured products (or simply dual directionals). Since our first version of the paper, our work has been covered by and in November of 2012 named a dual directional as their trade of the month. The latest version of the paper is available from the SLCG website and SSRN.

In this version of the paper, we expanded our scope by studying all dual directionals registered with the SEC since 2008. We divide dual...

Structured Products: 2012 Year-End Market Review

Last year, we covered Bloomberg's summary of the 2011 structured product market by noting that almost "$45.5 billion worth of SEC registered structured products were sold in the US in 2011, down only slightly from $49.4 billion in 2010." In 2012, 7,909 notes totaling just over $39 billion worth of SEC registered structured products were sold in the US -- a decrease of nearly 15%.

Interest rate products continued their decline in popularity with a decrease of almost 30% from 2011 to 2012....

SLCG Research: Volatility Smiles from Leveraged ETF Options

Leveraged ETFs are a perennial subject on our blog. I thought I'd take this opportunity to highlight a recent research project entitled "Crooked Volatility Smiles: Evidence from Leveraged and Inverse ETF Options" that I recently completed with my colleagues Geng Deng, Craig McCann and Mike Yan.

While studying options data on leveraged and inverse ETFs, we began to notice a pattern such that deep-in-the-money call options -- contacts whose strike price is well above the current spot price --...

SEC Litigation Releases: Week in Review - January 4th, 2013

SEC Charges California Company and CEO with Defrauding Investors in Nevada Gold Mining Venture
January 3, 2013, (Litigation Release No. 22585)
According to the complaint (opens to PDF), Nekekim Corporation and its CEO, Kenneth Carlton, "induced hundreds of investors to pour $16 million into a fruitless gold mining venture." From 2001 to 2011, the defendants attracted investors claiming that a physicist (who in reality "had no scientific training") helped "develop a confidential gold extraction...

ETP Turnover in 2012

2012 was a busy year for the exchange-traded product (ETP) market. As we've noted before, many new funds have been created, and many others have been closed and liquidated. The analysts at IndexUniverse have been keeping track, and have produced the final year-end tally for 2012.

In all, 178 ETFs or ETNs were launched in 2012. iShares (BlackRock) was the largest issuer in terms of number of new funds, but the market was highly divided such that 44% of funds were launched by the smallest 26...

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