Goldman, Sachs & Co. Nikkei Put Warrants 一 1989
Case Study
Risk Management (FIN413)
Winter 2025
Study questions
One purpose of the case is for you to identify the key issues. It follows that you are free to address in your case submissions those issues that you have identified as being key. Indeed, the grade on the case will reward the independent thinking of your group.
Nevertheless, in order better to focus your analysis, some key issues are indicated below:
● Why were Nikkei-linked Eurobonds issued? Make sure that you understand how the embedded puts can be stripped from the Nikkei-linked Eurobonds, and how these puts can be repackaged and resold. What other type of instrument could you design to satisfy the preferences of the alleged buyers of these bonds? As a bank owning these puts, what can you do with them?
● Study the proposed design for the Nikkei Put Warrants (NPWs). What features are primarily designed to appeal to the target U.S. retail clientele? What features are primarily designed to simplify the process of creating (hedging) the NPWs? How do features of the proposed NPWs differ from those sold to institutional investors? To retail investors in Toronto?
● Why is the Kingdom of Denmark issuing these warrants? What do they gain? What risk do they bear in the proposed transaction?
● What risks does GS&Co. bear in executing this transaction? How are these risks mitigated? Specifically, compare how the security design chosen and the raw materials available affect the exchange rate risk faced by GS&Co. and by BT Bank of Canada (sellers of the first Toronto-listed Nikkei put warrant). Describe how you think GS&Co.,s QUANTOS product wiII mitigate the risk of exchange rate changes over time.
● Assuming GS&Co. must invest $1.00 per warrant to hedge its currency risk using QUANTOS, what is the lowest price per warrant that GS&Co. could charge for the currency-hedged NPWs and still break even?
o If the NPWs were European-style, and not American-style, what would the minimum break-even be?
o How will the American-style feature affect GS&Co’s break-even? Why? How much of a difference do you think it will have on the break-even price you calculated?
o How should GS&Co. price the warrants? Why?
Recommendations
It is strongly recommended to include following elements in your final report:
● An introduction that presents the problem of the case, your methodology and your conclusions.
● The main analysis (explanatory, quantitative, ...). The choice of approach is up to you.
● Be explicit about all the assumptions that you make.
● A clear and concise analysis of the questions. Aim for a total case study length of 10-12 pages (minimum 5, maximum 15), including any graphs and figures.
● A conclusion
● An accurate bibliography with references for ALL calculations, data, ideas, etc. that are not yours. You can use any reference/ bibliography you want, just please be consistent.
Deadline
Each group must submit the final report in PDF format on eClass by Tuesday 8 April 2024 at 11:00.