In August 1986 Salomon Brothers issued four-year Standard and Poors 500 Index Subordinated Notes (SPINS). The notes

Question:

In August 1986 Salomon Brothers issued four-year Standard and Poor’s 500 Index Subordinated Notes (SPINS). The notes paid no interest, but at maturity investors received the face value plus a possible bonus. The bonus was equal to $1,000 times the proportionate appreciation in the market index.

(a) What would be the value of SPINS if issued today?

(b) If Salomon Brothers wished to hedge itself against a rise in the market index, how should it have done so?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...