Dorm-Room Hedge Fund Had Its Own Values
Also IPO disruption and WeWork.
A structured note is a bond issued by an investment bank that contains one or more derivatives on some stock or index or other financial quantity. A classic is: You give the bank $100, and in three years if the S&P 500 Index is up you get your $100 back with a return that is some multiple of the return on the S&P 500; if the index is down you get back your $100 with no interest. In practice a lot of structured notes are a lot more complicated than that, but that one is fine for our purposes.
Analytically the structured note is (1) a credit instrument of the bank plus (2) one or more derivatives. The S&P one, for instance, is just a three-year zero-coupon $100 bond of the bank plus a call option on the S&P 500. Those things are pretty well understood, and you can—and the bank surely will—plug the parameters of the structured note into a fairly standard set of models and get back a value for the structured note.1 The value will be, like, $97. The bank will sell you the note for $100. It makes $3. It’s a pretty good business, for the bank.