Dual Directional Structured Products
By: Geng Deng, Tim Dulaney, Tim Husson, and Craig McCann (Jan 2013)
Published in the Journal of Derivatives & Hedge Funds, (5 June 2014).
We analyze and value dual directional structured products - or simply dual directionals
(DDs) - which have been issued in large amounts since the beginning of 2012. DD's evolved
out of another type of structured product called absolute return barrier notes (ARBNs);
however, DD's lack principal protection and have different embedded options positions, which
have yet to be described in the literature. We find that DDs can be broadly organized into
two categories: single observation dual directionals (SODDs) and knock-out dual directionals
(KODDs). We determine the appropriate option decomposition for these categories and
provide analytical formulas for their valuation. We confirm our analytic results using Monte
Carlo simulation and use both techniques to value a large sample of DDs registered with the
Securities and Exchange Commission up to December 2012. Our results indicate that like
many types of structured products, DDs tend to be priced at a significant premium to present
value across issuers and underlying securities and that the present value of the decomposition
is smaller than the face value net of commissions. We find that DDs with embedded leverage
or a single observation feature tend to be worth less than products either without leverage
or with a knock-out option.
