Lesson 25 of 25 · 8 min

Four structures, one table of consequences

Each of the four changes downside, upside, collateral value, liquidity and horizon, and none of them changes only one.

One position, four structures, five consequences each. The position is 18,000 shares at $92.50, so $1,665,000, inside a pledged pool of $2,775,000 whose other $1,110,000 carries a 73 percent advance rate. The name carries 38 percent, so lending value is $632,700 + $810,300 = $1,443,000, and a $900,000 balance gives loan to value of 62.4 percent.

What each structure does, on those numbers:

Protective put, struck at $80 for $6.15 a share: downside floored at $1,440,000 less the $110,700 premium, so the worst case is a 20.2 percent loss; upside intact less 6.65 percent of position value; unrecognised with the premium drawn, lending value is unchanged at $1,443,000 while the balance becomes $1,010,700 and loan to value 70.0 percent; liquidity unchanged; horizon set by the expiry.
Collar, adding a written call at $108 for $5.40: net cost $13,500; outcomes bounded between a 14.3 percent loss and a 15.9 percent gain; recognised at 86 percent of the floor, lending value rises to $2,048,700, and unrecognised with $132,000 of call margin inside the pledge, usable lending value falls to $1,311,000; liquidity unchanged; horizon set by the expiry, with assignment possible earlier.
Prepaid variable forward at 78 percent: $1,298,700 of cash arrives now; downside limited at the floor and upside capped at the ceiling; the shares are committed, so their $632,700 of lending value goes to zero and loan to value is $900,000 ÷ $810,300 = 111.1 percent unless the prepayment repays the balance, in which case it clears it with $398,700 over; horizon three to five years.
Exchange fund: single-name exposure falls to roughly 2 percent of unit value, around $33,300; upside becomes the pool's; no cash arrives; the units are non-marginable, so lending value falls to $810,300 and loan to value is 111.1 percent with nothing to sell; horizon a multi-year lock-up.

Compare one consequence across the four rows rather than reading a row end to end. Two structures generate cash and two do not. Two leave the shares in the pledged account and two remove them. Every row moves at least three of the five consequences, and none moves them all in one direction.

There is no row here that reduces risk and leaves everything else where it was. That absence is the finding, and it is the reason the arithmetic has to be done on all five columns rather than on the one that prompted the question.

Key terms

Upside participation: The share of further appreciation that still reaches you. A ceiling, a cap or a pool interest each reduce it in a different way.
Recognition: Whether a lender's schedule prices a structure at all. It determines the sign of the effect on lending value, not just the size.
Horizon: How long a structure binds. An expiry, a settlement date and a lock-up are three different lengths with three different exits.

Worked example

The same position under four structures

18,000 shares at $92.50, so $1,665,000, at a 38% advance rate, inside a $2,775,000 pool whose other $1,110,000 carries 73%. Lending value $1,443,000, balance $900,000, loan to value 62.4%. Illustrative terms throughout.

Protective put at $80: Loan to value 70.0%
Collar, recognised: Loan to value 43.9%
Collar, unrecognised: Loan to value 68.6%
Prepaid variable forward at 78%: $1,298,700 of cash
Exchange fund: Loan to value 111.1%
Structures that reduce downside and leave lending value alone: None of the four

Five columns, four rows, and not one row where the collateral consequence is nil. The consequences differ in kind, not in degree.

Check yourself

On the position above, the prepaid variable forward and the exchange fund both take lending value from $1,443,000 to $810,300. What distinguishes their consequences?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.