Dual Directional Structured Products

We analyze and value dual directional structured products -- or simply dual directionals (DDs). We find that DDs can be broadly organized into two categories: single observation dual directionals (SODDs) and knock-out dual directionals (KODDs). We determine the appropriate option decomposition for these categories and provide analytical formulas for their valuation. We confirm our analytic results using Monte Carlo simulation and use both techniques to value a large sample of DDs registered with the Securities and Exchange Commission prior to December 2012. Our results indicate that like many types of structured products, DDs tend to be priced at a significant premium to present value across issuers and underlying securities and that the present value of the decomposition is smaller than the face value net of commissions. We find that DDs with embedded leverage on upside returns of the underlying have a significantly lower average value than their unleveraged counterparts. We also find that the more frequently issued category of dual directionals (SODDs) have a significantly lower issue date valuation than their less common counterparts (KODDs).