What's the most exotic product you've seen/heard?

polysena · Post by **polysena** » Tue Mar 27, 2018 2:08 pm

What is exactly a fractional equity? Does it have to do with retention requirements?

Cheng · Post by **Cheng** » Tue Mar 27, 2018 2:22 pm

A 50 year insurance hedge. It had all sorts fun risks.

Isn't that your good ol' 1980s A&E insurance police? Big Smile

Osiris2 · Post by **Osiris2** » Tue Apr 03, 2018 7:05 pm

"What is exactly a fractional equity? Does it have to do with retention requirements?"

It's like I have a subordinated lien on your home vs. some participation in the value of the property, but no contractual debt instrument.

I give you some money and in return I get some amount of the value when you sell or refi.

Osiris2 · Post by **Osiris2** » Tue Apr 03, 2018 7:06 pm

deeds · Post by **deeds** » Wed May 09, 2018 1:35 pm

Just finished valuation of elements of a deal for OTC traded company

- senior secured convertible bond, among other unusual features, had to isolate the value of the following

-- interest resets annually based on level of stock price relative to conversion price

-- change of control redemption right w make-whole premium from table in 8-K based on stock price / conversion price ratio

- Option over those same notes

-- exercise price payable in mixture of stock and cash determined by holder, with fixed stock divisor determining number of shares in stock consideration

A GS special...i thought i might have seen something like this once before, but can't put my mind's hand on it...anyone seen this kind of thing?

ronin · Post by **ronin** » Wed May 09, 2018 3:08 pm

That's surely just some vanilla calls, with a layer of callability on the entire structure?

day1pnl · Post by **day1pnl** » Thu Jun 20, 2019 7:59 pm

Re: “ My all-time favorite: a 10y CDO, callable after 5 and 7 years, notional increases by 100% if no called (i.e. 200% after 5 years, 300% after 7 years). Of course the tranche was AAA rated...

Nobody back then (and even today) had a chance to hedge this option to whatever extent. So it was really toxic for both parties, buyer and seller. I hope this one never printed...”

Just saw a very similar callable synthetic credit tranche idea pushed very recently. Both with callabilty and step up in accumulated coupon. You have a berm-like decision in your case in the 5y point... which is well not event remotely hedgeable... so only way it Can make sense is that you precisely dont want to hedge it but just sit on the optionality. My thought process is Can make sense for mezz protection..you want to own mezz protection for the convexity. when your mezz has de-levered so much that there is no convexity, then theres no point in owning it so you sometimes wish “if only i had the right to cancel this trade” or force someone to take profit... you could spend your risk lims better on a new structure with a tranche is closer to being ATM from exp. Loss point of view (more convexity)...

nikol · Post by **nikol** » Fri Jun 21, 2019 2:45 pm

Warrant issued in jan 2001 (or 2002?) with promised 10% equity dilution if stock price exceeds EOY strike by 1%, where:

EOY strike = average of EOM strikes during a year

EOM strike = average of EOD close prices during a month

Trader asked me to price it September/August (mid year). I did brutal force - 3-dim recombining tree for Asian (first - spot, second - monthly average, third - yearly average).

Gamma had a broad/weak peak and very strong/sharp peak at the spot.

The result of that was strong pinning of price, where market was completely dead apart from rare attempts to move the price away from bid-ask, which were killed by hedgers immediately.

Since then I am in love with pinning effect.