(24-04-2013, 05:48 PM)AlphaQuant Wrote: [ -> ] (24-04-2013, 05:33 PM)revolta Wrote: [ -> ]I am curious how bank or issuing company of ELN earn money?
once i bought ELN, it will have 3 scenario:
1) stock price move up and i get the interest.
2) stock price remain same value and i get the interest.
3) stock price goes down and hit my strike price, i carry the stock.
Does bank or issuing company earn from all 3 scenario?
an ELN typically involves the purchase of a bond and an option.
the issuer makes off the spread all the time i.e. it purchases the bond+option at a lower price, packages it into a note, and then sells the paper to the investor at a higher price.
the spread is locked in and does not depend on whether the investor makes or loses - what matters is to sell them to as many people as possible to make as much of the spread as possible.
Well, i will look at it from the perspective of hedging.
In situation (1) & (2), issuer paid a small premium for the insurance, and investor get paid to provide it.
In situation (3), issuer protected by further downside from strike price, by paying a small premium.
(24-04-2013, 09:30 PM)CityFarmer Wrote: [ -> ] (24-04-2013, 05:48 PM)AlphaQuant Wrote: [ -> ] (24-04-2013, 05:33 PM)revolta Wrote: [ -> ]I am curious how bank or issuing company of ELN earn money?
once i bought ELN, it will have 3 scenario:
1) stock price move up and i get the interest.
2) stock price remain same value and i get the interest.
3) stock price goes down and hit my strike price, i carry the stock.
Does bank or issuing company earn from all 3 scenario?
an ELN typically involves the purchase of a bond and an option.
the issuer makes off the spread all the time i.e. it purchases the bond+option at a lower price, packages it into a note, and then sells the paper to the investor at a higher price.
the spread is locked in and does not depend on whether the investor makes or loses - what matters is to sell them to as many people as possible to make as much of the spread as possible.
Well, i will look at it from the perspective of hedging.
In situation (1) & (2), issuer paid a small premium for the insurance, and investor get paid to provide it.
In situation (3), issuer protected by further downside from strike price, by paying a small premium.
So does it mean, the issuer does not really make money by selling ELN, they are buying insurance for themselves when they sold ELN.