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Any Income-producing Asset Can Be Calculated For Their Future Expected Cash ...

Any income-producing asset can be calculated for their future expected cash flows at an appropriate rate, when taking into account all relevant information, for example credit rating, interest rate risk, discretionary variability of dividend income, trading, and tax costs (Arnott, R. & Bernstein, P 2002:22).
Equity default swaps
Equity default swaps use the credit default swap technology, but not to transfer credit risk, they transfer the risk of major diminution in the market value of shares. Another feature of equity default swap (EDS) application has been that credit default swaps CDOs have been included in equity default swaps in their overall portfolio, together with, the total rate of return swaps (Davydov, D & Linetsky, V 2001).
The first major transaction of CDO integrate EDS was Moody's Odysseus deal arranged by Morgan, which consisted of a portfolio of 100 reference entities, with 10% of these being EDS. In 2004 in Japan Daiwa Securities took the EDS concept further when it launched the first publicly rated arbitrage CDO 100% collateralised by EDS. Zest Investments issued 31.5 billion notes in five different classes, backed by EDS on a portfolio of 30 quoted blue chip companies'. Payment to the protection will be triggered if the share price of any of the companies in the EDS portfolio falls by more than 70% from its initial price and if the share price fails to recover to the initial level by December 2008 (Camara A 2005).
Barrier options
Barrier options are a well-accepted type of path-dependent options traded over-the-counter on stocks, stock indexes, currencies, commodities, and interest rates. There are several reasons to use barrier options rather than standard options. First, barrier options strongly match investor beliefs about the future behaviour of the asset. Second, barrier option premiums are generally lower than those of standard options because an additional condition has to be met for the option holder to receive the payoff. The premium can be reduced considerably, in particular when the volatility is high (Davydov, D & Linetsky, V 2001).
A digital barrier option is a digital option that includes a barrier, which, if reached during the life, affects the existence of the option. The barriers may be placed either above the strike or below, meaning that prior to expiry, an active digital can be knocked out or an inactive digital can be knocked in. Because the use of barriers decreases the probability that the digital will pay off, the gearing factor will be higher than a regular digital. A digital option is an option that pays out a fixed amount if the option at maturity is in the money (ITM). It is similar to a European option in that at expiration it must be ITM to payout, and similar to a One-Touch Binary in that it pays a fixed amount (Camara A 2005).


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