Variable pre-paid forward

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SanFranCFA

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This is in reference to reducing a concentrated position. So if you enter a forward to deliver 100k shares of XYZ this is considered a constructive sale, but if you enter into a variable prepaid forward for a contingent # of shares- this is not constructive?
Is the only difference that one has a specified amt of shares (100k) and the prepaid one does not or am I missing something else?
 
i thought variable prepaid forward is like forward it is just that you get money upfront, but then again, there is a word ‘variable’
 
Variable Pre-paid Forward, is when you put a zero-cost collar on a concentrated position, then take a loan out on 70-90% of the value and purchase a diversified set of assets, say S&p ETFs.
 
“The PVF allows the investor to receive an up-front payment (typically, 75-85% market value) in exchange for delivery of a variable amount of shares or cash in the future. Since the contract establishes floor and threshold prices that govern how many shares (or cash equivalent) are returned at a given market price, the investor will be protected against downside risk below the floor while enjoying appreciation potential up to the threshold.”
From Wikipedia, same thing as monetized collar where you get the loan on put price
 
the fact that one week before the exam, i don’t even remember the terms constructive sales and variable fwds is seriously scary.
any page number for reference please ?
 
thanks. i am beginning to realise that my cheerio string is shorter than a session .. nothing stays
 
a prep.var.fwd is not exactly a forward, in order to compare how “forced” you are to deliver the underlying at maturity.
for example:
+ you have 100 mio usd of stock
+ you buy a put with strike 85%
+ you sell a call with strike 130%
+ for simplicity, imagine that this is a zero cost collar
+ one bank gives you a “zero coupon” loan, giving you the PV of the lower strike 85%
at maturity you must give back the notional of the loan (85 usd mio). you can either deliver cash, or deliver the shares (that will be worth at least 85 usd mio because of the put).
if underlying goes up, you either deliver (85 usd mio + any upside above the higher strike, as you are short a call) or deliver a num of shares so that you are equivalent in monetary terms
I think this is why the prep.var.fwd is not considered a constructive sale (only if strikes of the collar are not very very close). It is more a way to get financing than a way to unwind a position
 
constructive sale of a variable prepaid forward is when you cash settle this at maturity. If you take back your shares then it isn’t a constructive sale..
Was this really covered to this extent?
 
pimp Wrote:
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> What LOS is this? I don’t think this was covered.
it is not in Schweser :) it is in Tax management. Schweser just call it “hedging”
 
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