MITTS InvestmentMarket Index Target-term Securities are also known in the market as equity-linked notes, and are essentially bonds that are linked to an index or a series of stocks. MITTS investments have been designed for two things: 1) limit downside risk MITTS were originally created by Merrill Lynch, and are traded on the New York Stock Exchange. The real kicker with the MITTS is that under the terms of the investment, investors are guaranteed to get their money back come maturity time. Now, if the stocks rise higher, investors get a share of that increase in the value of the stocks. Merrill Lynch is able to do these types of funds due to financial engineering that allows such a payment structure. Once Merrill brings these securities public, part of the proceeds go into a zero-coupon bond that guarantees the principal at maturity. The balance of the funds, go into a long-term index option that locks in the increase in the index over the life of the security. The net result is guaranteed principal capital with unlimited profit potential on the upside. This makes these funds great investments from options strategy perspective. Thus, in order to price these opportunities accordingly, you should use options pricing models to factor in the potential in the fund. These models derive much of their pricing information from the underlying variability of the asset in question, such as a stock market index or a sub-index. The risk to the principal in these assets comes from the probability of a default by the issuer, in this case Merrill Lynch. If you'd like to see these types of investment vehicles from other financial institutions, look up investments under equity linked notes, or ELNs. |