Attached is the first page of a prospectus for a Reverse Exchangeable Note issued by ABN-AMRO.The security was sold to investors for a price of $1,000.
a)Describe the structure of the security.What are the payoffs to an investor who buys a Reverse Exchangeable Notes?
b)Show that the GE RES is equivalent to a package consisting of a coupon bond that is sold by ABN AMRO to the investor plus a put option that the investor sells to ABN AMRO.The put option allows ABN AMRO to sell GE shares to the investor at a fixed price, the face value of the bond.
c)Assume that the volatility of the underlying stock is 40%, the appropriate discount rate for the bond is 6%, the risk free rate is 3%, and that the GE stock pays a 2% dividend.Calculate the theoretical price of the bond and the put option.What is the theoretical price of the Reverse Exchangeable Security?
d)It is claimed that the security is mispriced because the volatility of the underlying asset is 40%.Assuming that the volatility assumption is correct do you agree that the security is mispriced?
e)?
504 805 6750 Stewwt Center Tulang 11:00:31 am 10-20-2006 3 708 PRICING SUPPLEMENT Pricing Supplement No. 6 to (TO PROSPECTUS DATED JULY 3, 2002 AND PROSPECTUS SUPPLEMENT Registration Statement No. 333-89136 DATED JULY 8, 2002) Dated January 31, 2002 ABN.AMRO Rule 424(b)(3) $9.750,000 ABN AMRO Bank N.V. MEDIUM-TERM NOTES, SERIES A Senior Fixed Rate Notes 10.00% Reverse Exchangeable Securities due February 5, 2004 linked to comm on stock of General Electric Company The Securitas do noi guarantee acy return of principal at maturity, Insload, if ire closing price of the shares of common slick of General Fistiic Conpart to as the Wide Jimhurting shans, i below a certain lovel on the third inding day prior to the ma amount of each Security and could be more. maturily dine, which wa refer to as the we shares a Celeminato in the principal 10.50% Auroras Exchangeable Securities due Fabeunry 5, 2004, Maturity the Underlying Shares on By determination doin Principal Ama want 19. 7501 009 .i me doning price per Underlying Share on Un Underlying Shares Common ndirk pir waive food per www of determination date is at or above the hilal price, we General Electric Company dayty pinoud maui of each beauty in cash, Interest Ruin 18.00% per annum, payable warri-annually in - I the dosing price pay Lindyortying Ehharsh anwar on August , 2003 and February 5, 2004 determination dale is below the Inayl pnos, w deliver to you, in excharge for each $1,000 principn attour of the Sicurisis a s a number of Underiging Original issue Date Battlemint Data] February 5, 2003 damplion inourt, * You wil receive each in lee of factorol stores. Maturity Bulg Denominations February 5, 2104 The Securities may be purchased in Corominalers of 51,000 and Integral multiples thereol. Initial Price 123. 14 (tha dosing pics pir Underlying Sharp ha Securties will be represented by a singo regained Josumy 31. Securities. 2003, the deis we h diegoold with the Dogoalory Trust abject to corporate events allacting tho Underting Shares r carlain Comparty No Amilton will Ourgral Elacine General al Hisciric Compary which with we duterte in"Daneryion of Secundim Genial Bincirio, Is not as afillate of cure and is ma Company Involved with his offering in any way. The obligationm Block Redemption Amount 43 215 Undodying each h 41,900 and by the Sunsales are ca chigations, so painsloof amount of the Securites, which is equal 1 1, 030 divided by be Initial price. not equivalent to investing in General tierinc common mination Duis The bid ndry dy plo lo be malvaly dors wulject lo adusimam in curtain circumstances The a Securties have been approved ler listing on the which we a age LLC, which the AMEX, Butfool to offkil make of ivan -Determination Dole". AMEX symbol for the Securties is "REX.K. The Securities are not Insured by the Federal Deposit Insurance Corporation or any other fodoral agency. The Securities involve risks not associated with an Investment in conventional debt securities. See "Risk Factors" beginning on PS-7. The Securities and Exchange Commission and alale securities rojaisto's have not approved of disapproved these Socumis, or dotemisod Prospectus Supplymart is truthful of complely. . Ary representation in the contrary is's aiming al offense The apinis are not obligal Ignied to purchase the Securilion but have agreed to uns rasenabis efforts to gofloll offirs to purchase tha Securi curilies. Thi total agrigate principal amount of the Socunities being offered by this Pricing Supplies more of tur amilisten has agreed to purchase the unsold portion, which does not exceed 1075,050, and to hold such & i was net parchased by lovesters in the offering. Ona or period dat Toast 30 days. Soo "Holding of the Bosurides by Our Affiliales and Future Sales" under the heading "Aik Facion" and "Pian This Pikring Supplynort and the accompanying Prospectus Bugplugged and Prog the Securities in market-making transactions. pocus may be uned by tor initiates in correction with oflars and salas al PRICE $1,000 PER SECURITY ABN AMRO Financial Services, Inc. ABN AMRO Incorporated January 31, 2003
