EFTA01393178

anticipated change in the level of the underlying index, but he must also be right about the degree of the change because the option will have a reduced payout or drop out of the money altogether it the underlying index moves too far in either direction. In that case. a range option holder may lose all or a significant part of his investment in the option. On the other hand, the direction in which the underlying index moves will not affect the payout for a range option as long as it stays within the middle range. 2. The writer of a rang) wlion like writers of other cash-settled options, runs the risk that the option will expire in the money and he will be required to pay the cash settlement amount. The writers potential loss is limited to the maximum cash settlement amount of the option minus the premium received. Actual loss will depend on where the level of the underlying index falls within the range length. EXAMPLE: An investor receives a premium of $10 for writing a range option on XYZ index that has a maximum cash settlement amount of $100. Assume that the option has a low range from 93 to 100, middle range from 100 to 110. and a high range from 110 to 120. If the level of the XYZ index at expiration is 100 (Le., falls in the middle range), the investor will incur a loss of $90 (the $100 paid to the holder of the option less the $10 pre- mium received when the option was written). If the level of the XYZ index at expiration is in the low range or the high range, the profit or loss incurred by the investor will depend on where along the low range or high range the index level falls at expiration. 3. Range options may be more difficult to hedge. or to use as a hedge, than other types of options because of range options' unique payout structure. A range option would be a perfect hedge only for a risk exposure to the underlying interest that varies with the level of the underlying interest in the same unique way as the payout structure of the range option. In addition, as in the case of a binary option, it is not possible to precisely offset the risk of writing a range option through ownership of the underlying interest. 147 CONFIDENTIAL - PURSUANT TOEFEESERLYO0,18632 P. 6(e) CONFIDENTIAL SDNY_GM_00244816 EFTA01393178