On share purchase programs
A kind of structured product that has become fashionable these days are the structured share purchase programs. It is mainly used in shared purchase program by a corporate client. When a corporation wants to purchase back its own shares, it normally contacts a brokerage firm or investment bank for this. The purchase program will then be announced before the start of the purchase program, the announcement may have an impact on the price.
In a normal share purchase program the brokerage behave as an agent and purchase a fixed amount per day up up to a certain notional amount or a certain number of shares. The amount purchased per day is dependent on the deadline and the target notional or the target number of shares. The deadline or maturity of the purchase program is quite important for the corporate client, the deadline is normally before a quarter announcement or accounting period. Depending if the corporate client has a target notional or a target amount of shares to purchase, the share repurchase program is called fixed notional or fixed shares.
A new structure has been recently more fashionable, these structures which have been proposed by the investment banks can provide cheaper prices. Under those structures the maturity and target shares or notional is fixed, but the total amount of shares purchase varies. The investment bank has the optionality on how many shares to purchased per day as long as it commit itself to finishing the purchase program by a certain deadline and do not exceed a certain amount of shares on its daily purchase . With such programs the investment bank is able to give a discount to the client, on the other hand the investment bank will be paid the VWAP average price minus the discount over the period. A good trader taking advantage of the daily optionality can beat the VWAP average price. Hence in many circumstances it is desirable for the investment bank on not to delta hedge this structure, keep the option naked in the book so that the trader can make money out of daily movement of the prices.