Coursework for the structured products module at SMU. The brief was a client portfolio and a set of objectives, and the job was to propose a suite of structures across asset classes that would get her there.
SMU coursework, 2024. Prices and levels are from then.
Rebalancing without going to the market
The client was concentrated in Apple and wanted a two million dollar portfolio split evenly across Apple, Microsoft and Nvidia, so roughly $667,000 in each.
The obvious answer is to sell Apple and buy the other two. We proposed doing it with decumulators on the Apple position instead, struck at $196 over six months. That works out at 6,771 shares to offload, about 37 a day. On the other side, accumulators on Microsoft and Nvidia at the same expiry: 1,573 shares to pick up on Microsoft at around 8.6 a day, and 551 on Nvidia at about 3 a day.
Done this way the client rebalances gradually and at a better level than she would get in the market, and the strike is set as high as we could reasonably offer. If a leg knocks out during the period there is another product to write after expiry.
The income sleeve
For stability we proposed a fixed-for-floating interest rate swap, receiving fixed at 5% and paying SOFR plus 100 basis points on a one million notional. The view was that floating rates would come down as central banks engineered a soft landing.
Next to it, a floating rate note with an interest rate floor, so the position keeps a minimum return as rates fall. Structured alongside the swap, the aim was a roughly delta neutral rate exposure with a stable income stream.
Why it stuck with me
Most coursework asks you to value something that already exists. This one asked what to build for somebody, given a starting portfolio and a view.
Getting from “she is too concentrated and wants income” to actual strikes, notionals and daily share counts is what a structuring desk does all day, and it is the closest thing I did at SMU to the work I saw later at ING.