The value of your Lehman structured products

If you own a Lehman Brothers structured product issued in Europe, on a basic level, it works like this. The basic components you are ultimately invested in are a bond and an option. The bond is a zero coupon, which means it is issued at a price well below par. The value you have in the bond is whatever price you have bought it at, minus a bit more if the issue is newly launched and minus a bit less if it is nearing maturity. The bond will have been issued by and in the name of Lehman Brothers.

In addition, there is an option that will have been bought from a counterparty. That counterparty may have been the options desk at Lehman, or it may be the same desk at another bank. If that option – based on the performance of an underlying, typically an equity index, such as the FTSE – is in the money, ie it is performing better than anticipated, then the counterparty will owe money to the investor.

Valuing the option that is closed out as a result of the Lehmans bankruptcy is based on the