So, theres an example in the CFA text where they sell a structured note with 2x libor to an insurance co. So the seller of the structured note, takes the proceeds form th sale, and buys an issue of corp debt, but buys 2x to match the liability. Then he enters a swap witha dealer. My question is about the 2x libor and 2x corp issue he buys. What does this 2x actually mean? Like the 2x libor product he sells as a structured note, is it simply 2 floating bonds in this ‘sturctured note’? And the cash he gets from selling, is that enough to buy 2x an issue from the corp issuer? So instead of buying 100k par, does he buy 200k? I can do the problem, just wanted more clarification as to what the 2x means. does he receive double cash? The text states that these structured notes are strutured in a way to ‘hide’ the leverge and derivatives that insurance co’s and stuff cant hold, so they hold them via strutured note. But does the structured note issuer receive twice as much cash from the sale, that will enable him to buy twice as much debt from the corp issuer? Thanks…
2xlibor means 2 times libor rate. Suppose libor is at 5%, then he will pay/receive 5*2= 10% on that leg.
how is it priced though? does he pay twice the face value of a 1x libor pay?
yes
why doesnt the insurance co simply by double the face value of a 1x libor? therefore no need for the structured notes? or are they not allowed to hold debt instruments that are exposed to libor?
Remember we are just doing the problem-what CFAI gives us-we do not argue why.