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ANSWERED on Tue 30 Oct 2012 - 7:54 pm UTC by David Sarokin

Question: Magrabe Option Example (as pertaining to Asset Exchange Index from S&P)

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kondratievwave 

Customer

 29 Oct 2012 19:23 UTCMon 29 Oct 2012 - 7:23 pm UTC 

Hi, I'm looking to have a few examples of a Magrabe Option worked through. Specifically, I am looking for a worked example of how the Standard & Poors Dynamic Asset Exchange Index works. The specifics are found at this link: http://www.standardandpoors.com/indices/articles/en/ap/?articleType=PDF&assetID=1245306688086

The index construction information is on page 4 - 6. That is the methodology. I would like to see this worked through, or another example of a Magrabe option worked through if possible. If you could find an online spreadsheet or something like that, that goes through each input of a Margrabe option and works the problem out, that would be ideal. I can conceptualize how this works, I just want to see the exact inputs that go into it from one period to another. Thanks! Feel free to ask any clarifying questions. To help you, a Margrabe option is sometimes called an outperformance option.

 
 

kondratievwave 

Customer

 29 Oct 2012 19:25 UTCMon 29 Oct 2012 - 7:25 pm UTC 

Some more clarification: each input for the formula would be specified, and entered, so that I could see how the inputs were arriving at an answer for the value of the option. I can read and (kind of!) understand the variables, I just want to see them worked through with real numbers instead of variables to try to completely understand it.

 

David Sarokin 

Researcher

 29 Oct 2012 21:13 UTCMon 29 Oct 2012 - 9:13 pm UTC 

There's a Margrabe calculator spreadsheet at this link:

http://webcache.googleusercontent.com/search?q=cache:zXNcaaqHENQJ:www.cob.unt.edu/firel/Kensinge/Fina5220/OptionCalculator.xls+&cd=1&hl=en&ct=clnk&gl=us


about 1/5 of the way down the page.

The data are computed by the underlying spreadsheet formula, which look like this:

=(LN(B3/B4)+(0.5*C16*B5))/(C17*SQRT(B5))

Is that the sort of tool you're after?

David

 

kondratievwave 

Customer

 30 Oct 2012 00:21 UTCTue 30 Oct 2012 - 12:21 am UTC 

David, thanks for the start to this..the tool is interesting, but I'm hoping for a 'worked through' example of a Margrabe option, specifically, how it might change from one period to another as the different values change. I understand the variables that go into it, but I want to see an actual example or two that's been worked with a real-world application and hopefully real-world numbers that can help crystalize my understanding of how this formula works. I hope that makes sense.

 

David Sarokin 

Researcher

 30 Oct 2012 00:41 UTCTue 30 Oct 2012 - 12:41 am UTC 

kondratievwave,


Take a look at the actual spreadsheet:

http://www.cob.unt.edu/firel/Kensinge/Fina5220/OptionCalculator.xls


Margrabe is the fourth tab from the left (at the bottom of the spreadsheet).

You can vary the input data on the spreadsheet, and immediately see the re-computed Margrabe values based on the underlying formulas.

Is that what you're after? Or did you have something else in mind?

David

 

kondratievwave 

Customer

 30 Oct 2012 00:56 UTCTue 30 Oct 2012 - 12:56 am UTC 

This is very helpful, but I'd still really like to see someone elses exact walk-through vs. me entering the numbers. So an example where someone says "I've got this asset and this asset here at time=0, and now I have them at time=1, let's look at what happened. And then they show you all the steps. I can put the numbers in as you correctly point out, but I'm just dumping numbers in, not seeing someone else's walk through. IF you can't find something like that, this calculator is pretty good, but i'm looking for almost like a story problem or something that would be worked out and explained, vs. just a template with all the variables waiting to be filled in. Hope that's helpful. I guess it is the difference between someone showing me the Margrabe formula, and showing a template with the blanks, vs. the holy grail of actually HAVING a specific example walked through where someone describes everything step by step in more verbose format. Maybe it is too much to ask? ;) Thanks again this is really good...

Bill

 

David Sarokin 

Researcher

 30 Oct 2012 03:19 UTCTue 30 Oct 2012 - 3:19 am UTC 

Bill,

How's this one, then:

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.5483&rep=rep1&type=pdf
How to Value Indexed Executive Stock Options

Check the Valuation section beginning on page 2, and the worked out example on page 3.

Is that what you mean?

David

 

kondratievwave 

Customer

 30 Oct 2012 19:07 UTCTue 30 Oct 2012 - 7:07 pm UTC 

David, thanks this is very helpful. I think between all the resources you provided I am better positioned to understand this. You can consider the question answered, though one last small request would be if you came across anything that showed the use of these options to make decisions between one portfolio and the other (i.e. allocation mix between portfolio A of assets, and portfolio B of assets) that woudl be interesting. But if you didn't no big deal. Thanks for your work on this! ANSWERED! :)

 

David Sarokin 

Answer

 30 Oct 2012 19:54 UTCTue 30 Oct 2012 - 7:54 pm UTC 

Bill,

This one was quite a challenge...I'm glad we were able to find an answer for you.

As for portfolio decisions, I didn't see anything that hit the nail on the head, though these resources will (hopefully) come close enough to prove useful:

http://www.actuaries.org/PBSS/Colloquia/Helsinki/Papers/Andrews.pdf
A PRACTITIONER’S OBSERVATIONS ON SOME INNOVATIVE IDEAS FOR PENSION PLAN INVESTMENT
beginning on pg 7


http://us.spindices.com/documents/research/DynamicAssetExchange_WhitePaper_Final.pdf
Seeking Absolute Returns Using the S&P Dynamic Asset Exchange Index Series
beginning on pg 2


http://pacificglobaladvisors.com/wp-content/uploads/2011/07/Impact-of-Excise-Tax-on-Pensions-2005.pdf
The JPMorgan Framework For Measuring —And Managing The Risk Of— Overfunding And Underfunding In A Defined Benefit Pension Plan
entire paper


Let me know if there is anything more I can do for you on this.

David

 
 

kondratievwave 

Customer

 30 Oct 2012 20:06 UTCTue 30 Oct 2012 - 8:06 pm UTC 

Great work; found some nice resources for me to further explore this area and was very quick and professional in helping zero in on things. Thanks, David!

 

David Sarokin 

Researcher

 31 Oct 2012 02:40 UTCWed 31 Oct 2012 - 2:40 am UTC 

Thank you, Bill. Much appreciated.

David

 

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