DCR Net Asset Value Now at Zero

In early April, we pointed out the DCR/UCR trade to Bespoke readers, noting that if oil closed above $111 for three consecutive days, the two notes would hit termination at the end of the quarter at wherever their NAVs were trading.  UCR is the "oil up" note and its NAV is calculated by dividing the price of oil by three.  DCR is the "oil down" note and it is calculated by subtracting UCR's NAV from 40. 

Once oil closed above $111 for three days in a row (seems so long ago), the termination triggered, so at the end of this quarter, the notes will be distributed to holders at their NAVs.  But now that oil is trading above $120, DCR has no NAV [40-(120/3)=0].  Surprisingly, DCR's price is still trading at a premium to its NAV, and if oil is above $120 at the end of the quarter, owners will lose all of their money, effectively making it an option play on oil's decline at this point.  UCR, on the other hand, will distribute $40 per share if oil is above $120, even though its price is trading at $37.26. 

The image above is from MACROshares' website.

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Comments

[IBH]

The pricing seems wierd, to have a discount or premium with such little time left in the product. I can surmise only that the UCR, if traded at liquidation value at current oil levels, would be a no risk short sell (if it could be borrowable). Since the value cannot go higher than $40 at liquidation, if the value today were at that level, you have a no risk trade. As we know, there is no free lunch on wall street, so the price is probably apprpraite fot the risk till expiry. If this product is offered again, it would probably have some different structure and triggers to account for a large price change.