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Protecting the Value of Equity Holdings. 2 Equity Derivatives Situation: Joe Investor (”Investor") owns a significant number of shares in ABC Corp (“ABC”),

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Presentation on theme: "Protecting the Value of Equity Holdings. 2 Equity Derivatives Situation: Joe Investor (”Investor") owns a significant number of shares in ABC Corp (“ABC”),"— Presentation transcript:

1 Protecting the Value of Equity Holdings

2 2 Equity Derivatives Situation: Joe Investor (”Investor") owns a significant number of shares in ABC Corp (“ABC”), and may face these challenges: 1) How to protect against a decline in the price of ABC; 2) How to "monetize" ABC in the most tax efficient manner. The solution may be either a Equity Collar / Loan or a Variable Forward Sale.

3 3 Equity Derivatives ABC Price History:

4 4 Equity Collar

5 5 Equity Derivatives Solution: Equity Collar Hedge: An Equity Collar is a hedging technique that protects the Investor against a price decline by a specific maturity date. Monetize: Borrow and Invest: An investment purpose loan secured by the Equity Collar will transform the Investor’s single stock holding (ABC) into a diversified investment portfolio.

6 6 Equity Derivatives ABC Investor Total Return Current Price = $87.63 Future Price = $ ??

7 7 Equity Derivatives ABC Investor Total Return Equity Collar Current Price = $87.63 Future Price = $ ??

8 8 Equity Derivatives ABC Investor Total Return Equity Collar Current Price = $87.63 Future Price = $ ?? Future Price < $78.87

9 9 Equity Derivatives ABC Investor Total Return Equity Collar Current Price = $87.63 Future Price = $ ?? Future Price < $78.87 Future Price > $131.45

10 10 Equity Derivatives ABC Investor Total Return Equity Collar Current Price = $87.63 Future Price = $ ?? Future Price < $78.87 Future Price > $ Secured Loan Collateral Pledge

11 11 Equity Derivatives ABC Investor Total Return Equity Collar Current Price = $87.63 Future Price = $ ?? Future Price < $78.87 Future Price > $ New Investments Secured Loan Collateral Pledge Investment Purpose Loan = $43.82 Investment Returns

12 12 Equity Derivatives Indicative Equity Collar Pricing *: Term: 3 years Up-front Premium:$0 Floor: 90% of “average execution price” Ceiling:150% of “average execution price” Loan Advance:50% of share value * Pricing is indicative and for discussion purposes only. The ability to execute an Equity Collar is dependent on the stock’s trading activity and liquidity.

13 13 Equity Derivatives Equity Collar Benefits: Hedge against ABC falling below the Floor. Retain price appreciation on ABC up to the Ceiling. Properly structured Collars are non-taxable transactions. Investor retains voting rights and dividends.

14 14 Equity Derivatives Equity Collar Considerations: Future price appreciation is limited. Tax, legal and insider issues must be considered.

15 15 Equity Derivatives Equity Collar Timeline and Mechanics: Beginning of Transaction: (1) Investor pledges underlying shares to Collar provider. (2) Investor purchases Floor (Put) and sells Ceiling (Call). Maturity of Transaction: (1) Cash settlement of the collar. (2) Underlying shares returned to the Investor.

16 16 Variable Forward Sale

17 17 Equity Derivatives Solution: Variable Forward Sale Hedge, Monetize and Invest: A Variable Forward Sale (“VFS”) is an alternative to the Equity Collar. On the closing date the Investor sells his shares and receives cash, which is used to create a diversified investment portfolio. At maturity, the Investor delivers the shares previously sold. The number of shares delivered is a function of ABC’s share price at maturity.

18 18 Equity Derivatives ABC Investor Total Return Current Price = $87.63

19 19 Equity Derivatives ABC Investor Total Return Variable Forward Sale Current Price = $87.63

20 20 Equity Derivatives ABC Investor Total Return Variable Forward Sale Current Price = $87.63 Sale Proceeds = $69.59

21 21 Equity Derivatives ABC Investor Total Return Variable Forward Sale Current Price = $87.63 Sale Proceeds = $69.59 New Investments Investment Returns Investment = $69.59

22 22 Equity Derivatives ABC Investor Total Return Variable Forward Sale Current Price = $87.63 Sale Proceeds = $69.59 New Investments Investment Returns Investment = $69.59 Settle shares at maturity

23 23 Equity Derivatives Indicative Variable Forward Sale Pricing *: Term: 3 years Up-front Advance:79.42 % of “average execution price” Min.value at Mat.:100% of “average execution price” Max.value at Mat.:130% of “average execution price” * Pricing is indicative and for discussion purposes only. The ability to execute a Variable Forward Sale is dependent on the stock’s trading activity and liquidity.

24 24 Equity Derivatives Variable Forward Sale Benefits: Hedge against ABC falling below the Floor. Retain price appreciation on ABC up to the Ceiling. Properly structured VFS are non-taxable transactions. Investor retains voting rights and dividends. Greater up-front proceeds vs. the Equity Collar / Loan

25 25 Equity Derivatives Variable Forward Sale Considerations: Future price appreciation is limited. Tax, legal and insider issues must be considered. At maturity, Investor no longer owns shares delivered.

26 26 Equity Derivatives VFS Timeline and Mechanics: Beginning of Transaction: (1) Investor delivers shares to Collar provider. (2) Investor purchases Floor (Put) and sells Ceiling (Call). (3) Cash settlement, net of imputed interest, to Investor. Maturity of Transaction: (1) Investor and VFS provider “settle” shares. (2) Shares not owed to VFS provider are returned to Investor.


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