Wednesday, May 8, 2013

Update on Apple-Linked Structured Products

By Tim Dulaney, PhD and Tim Husson, PhD

A few months ago, SLCG issued a working paper (PDF) that studied the decline in value of Apple-linked structured products.  Jason Zweig of the Wall Street Journal also wrote a piece about these findings, most notably that Apple's stock price decline had serious repercussions in the structured product market.  Apple's stock price has continued to fall and we recently updated the paper to show how this decline is still affecting investors in structured products.* 

Since reaching $700 in September of 2012, Apple's stock price (AAPL) has fallen dramatically -- trading in the high $300's for a few days in April 2013.  The previous version of the paper focused on the losses experience by Apple-linked structured product investors as a result of their January 23, 2013 earnings announcement (SEC Form 8-K) after which the price of Apple common stock fell more than 12% -- a loss of more than $50 billion in market capitalization.

The updated analysis shows that Apple-linked structured product investors continue to bleed value.  The following figure shows the aggregate market value (as calculated by SLCG) of Apple-linked structured products outstanding between January 23, 2013 and April 24, 2013.
The aggregate market value of the 283 products in the sample fell over $37.6 million following the January 23, 2013 earnings announcement.  Between January 24, 2013 and April 24, 2013, SLCG estimates that these products lost an additional $37.2 million in value.**  These results should reinforce the fact that investors in equity-linked structured products are exposed to extraordinary market risks.

For more detailed information concerning these losses, please see our working paper on this issue. SLCG has also compiled a database of over 16,000 structured product research reports (over 800 linked to Apple) including full valuation and analysis of each product.

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* The types of structured products considered in the study were reverse convertibles (example), single observation reverse convertibles (example) and autocallable reverse convertibles (example).
** The aggregate market value of these products correlated very strongly (correlation higher than 0.99) with the closing price of Apple stock.

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