(FINANCE) patent pending a financial derivative that splits the
value of underlying asset in various proportions, each of which has a specific seniority level (less senior cannot be executed before the senior one). It allows the owner to claim either fixed monetary value or variable value share of underlying asset, depending on the specific Tranched Value Security's seniority.
A Tranched Value Security (TVS) allows one to get a
risk and return exposure to the specific level of underlying asset price
risk, as opposed to previously existent derivatives that allowed to do so with the entire asset price only. Within such design of financial security, owner of TVS is able to reap significant profits by taking limited
risk.
One could issue a Senior and
Junior Tranched Value Securities, each having a variable value share of 50%, and fixed value share of $40, backed by (say) one Bitcoin when it's price was $
100. If consequentially the Bitcoin price declines to $
80, the Senior TVS would remain at $50 (0% return), while the
Junior TVS would become $30 (-40% return). With subsequent price correction to $
110 per one Bitcoin, both TVSs would have a claim of 50% of market price ($55), making the return of Senior TVS +10%, and return for
Junior TVS +83%.
Buying a Senior Tranched Value Security is a way to get a long position in the underlying asset'
s potential returns, with significantly limited downside potential.
Buying a
Junior TVS is a way to get substantial return potential, surpassing that of leveraged positions, while having no
chance of being liquidated.
Selling a Tranched Value Security (TVS) is a way to get rid of the desired either upper (exposing oneself to greater returns) or lower part (exposing oneself to less volatile returns) of price
risk of underlying asset.