Legal Definitions - call equivalent position

A call equivalent position refers to a type of investment or financial holding that is designed to increase in value when the price of an underlying asset, typically a company's stock, goes up. Essentially, it's a position that behaves similarly to owning a "call option," which gives the holder the right to buy an asset at a set price, profiting if the asset's market price rises above that set price. Investors use these positions to gain exposure to potential upward movements in a stock without necessarily owning the stock directly.

• Example 1: Employee Stock Options

  Imagine an employee at a growing tech company receives stock options as part of their compensation package. These options grant them the right to purchase 1,000 shares of the company's stock at a predetermined price of $50 per share at any time over the next five years.

  How it illustrates the term: If the company's stock performs well and its market price rises to $80 per share, the employee's options become significantly valuable. They can exercise their right to buy shares at $50 and immediately sell them for $80, realizing a profit. This position directly increases in value as the underlying stock's value increases, making it a call equivalent position.

• Example 2: Warrants Issued with a Corporate Bond

  A manufacturing company issues new corporate bonds to raise capital. To make these bonds more appealing to investors, they attach warrants to each bond. Each warrant gives the bondholder the right to buy one share of the company's common stock at $30 per share for the next seven years.

  How it illustrates the term: Should the manufacturing company's stock price climb to $55 per share due to strong performance, these warrants become highly desirable. The bondholder can exercise their right to purchase shares at $30 and potentially sell them at the higher market price. The value of these warrants directly increases with the appreciation of the underlying stock, thus representing a call equivalent position.

• Example 3: Equity-Linked Certificate (ELC)

  An investor purchases an Equity-Linked Certificate (ELC) from a financial institution. This ELC is structured to provide a return that is directly tied to the positive performance of a specific pharmaceutical company's stock over a two-year period. If the stock price goes up, the ELC's value increases, but it offers no return if the stock declines or stays flat.

  How it illustrates the term: In this scenario, the ELC's potential payout and overall value are designed to grow in direct correlation with an increase in the underlying pharmaceutical company's stock price. The investor benefits only if the stock rises. This financial instrument, by its design to profit from an upward movement in the underlying equity, functions as a call equivalent position.