On share repurchase programs

A type of structured product that has become fashionable these days is the structured share repurchase program. When a corporate client wants to buy back its own shares, it normally uses its broker or investment bank to buy shares on the open market. The repurchase program will be announced before the start of the program and the announcement may have an impact on the share price.

In a normal share repurchase program, the broker behaves as an agent and buys a fixed amount per day up to a certain notional amount or number of shares. The amount purchased per day depends on the deadline and the target notional or target number of shares. The deadline for the completion of the repurchase program is often quite important for the corporate client and is normally set before the end of a quarterly accounting period or announcement. Depending on whether the corporate client targets a notional amount or a number of shares, the share repurchase program is called fixed notional or fixed shares.

A new structure proposed by investment banks has recently become popular as it can provide cheaper prices for the corporate client. Under these new structures, the maturity and target number of shares or notional amount are fixed, but the total number of shares that are repurchased can vary. The investment bank has the optionality on how many shares to purchase per day as long as it commits itself to finishing the repurchase program by the deadline and not buying back more than a certain number of shares each day. With such programs the investment bank is able to give a discount to the client. At the same time the investment bank will be paid the volume weighted average price (VWAP) over the period minus the discount. A good trader taking advantage of the daily optionality can beat the VWAP average price. Hence in many circumstances it is desirable for the investment bank to not delta hedge its position and keep the option naked in the book so that it can make money out of daily price movements.

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