Earlier this month, SLCG released a new research paper that values Dual Directional Structured Products (DDSPs). DDSPs are debt securities that feature payoffs very much like a long straddle position on the underlying asset for small price movements -- the investor realizes gains if the underlying asset increases or decreases in price (the origin of the term 'dual directional') within a certain range during the term of the note.
DDSPs have recently garnered significant attention in the press. Bloomberg Structured Notes covered DDSPs in their April 26, 2012 brief. Risk.net also recently featured a story covering these products.
We decomposed each structure product in our sample into an equivalent combination of options and then priced the options using conventional valuation techniques. Our research shows that, like most structured products, issuers charge investors substantial premiums to purchase these products. We also find that the DDSPs that offer investors leveraged exposure on the upside tend to be more overpriced than their unleveraged counterparts.