Neymar and Option: Insurance coverage on the down payment

FCB pay for the insurance for Neymar until 2014 By Mundodeportivo
The insurance package, against some grave injury that might terminate the career of the player, cost a bit more than 250,000EURO. (upto Jun, 2013).

Is it a good deal?

Neymar transfer has been an very interesting deal for FCB. A lot of speculation has been passed around, including how great the player is, the conspiracy theory with sponsor(Nike) and how Neymar might fit into the squad. However, this article has nothing to do with these. It simply looks at the deals from the asset pricing side.

1.) A pre-contract deal:
According various sources, FCB has paid 10 million advance to Neymar(or Santos) to sign the player. For me, it is like an option. You buy a right to enter into for the value of an asset. So, FCB did pay the rights for the future value of Neymar. we could picture this as a "Neymar Option" 

Looking at the figure above, such pre-deal advance indeed has a lot similarities with option. 

1-a.) Option is written by the third party: neither Santos, the owner of the asset now, or FCB, the prosepct owner. Neymar is the one who receive the advance, considering he is the person who writes the option.

1-b.) Asset ownership hasn't transfer yet. For example, when you buy an option, you did not buy the stock of Microsoft. you buy the "right" the purchase Microsoft at given price. 

1-c.) The future payoff of this option depends on the asset price in the future:  Here, is the most arguable situation. 

1-d.) Expiration date of options: It would be up to June. 2014, when Neymar and Santos finish their contractual term.

1-e.) exercise price: This is what puzzle me most. Among press we don't know how much it is. Now, the rumor about the transfer price is ranged from 30m to 40m, which FCB would pay to Santos for Neymar. However, that situation is not out clear there. Let's say 40m. 

Neymar's contract with Santos is up until June, 2014. In other words, if the transfer is activated in 2014, FCB would pay nothing to Santos.

The best exercise date for this option would be June, 2014. In that sense, the market value of Neymar would be the competing price between clubs. FCB has taken the initiative(entering this option) So,  Barcelona enjoy the upside payoff of this pre-deal until 2014, if Neymar's value in the future worth more than 40m, (They might even "sell" this pre-deal to the third party, if any would be interested.)

After 2014, the fair value of Neymar depends on his performance on the field, the "cash-generating" ability of this Brazilian players around the world (sell jersey, make advertisement, you name it...). Then, it would has nothing to do with this option structure anymore.

2.) Purpose of "Career Insurance": A 250,000 insurance policy has signed to insure a the value of initial down payment of 10m. In case the value of Neymar completely gone, by injury. So, this is an additional package to insure the down payment won't goes to water.

Looking to the figure above.  The only thing Barcelona has paid out now is the premium of 10m EURO, which is red part. (well, premium as for option terms) This also consider the maximum loss of option could bring to investor. In the picture, if the underlying asset doesn't go up as expected, the investor of option has the maximum loss of such premium. It starts has payoff when the underlying asset price goes up. 

FCB only insure of the situation of the underlying assets, Neymar, completely out of value: some great injury that terminate his career. We could see this deal as an additional hedge on the downside. It narrows the potential loss to something around 300,000EURO, not 10m EURO. 

3.) Implication, if any:
To narrow the risk/exposing amount to a future player is one thing, yet it seems it has one further implication: Neymar would only come to Nou Camp in June 2014. why?

If this mimicking layout of option were in fact the situation, then FCB would not need to buy any insurance, as people won't buy insurance for an option that has been exercised. You own the assets, you own the risk, the down payment of 10m is realized as a price you pay for the rights to buy the asset. End of story. 

If FCB already has the complete the transfer of the assets, have the ownership, the other type of insurance, which is medical insurance, would be more probable. When FCB own the assets(Neymar), his condition would therefore be control by the medical team of FCB and, if their salaries has been pay off, they should figure Neymar's situation from tip to toe( oh, probably not including the tip, the hairstyle:P) 

So, if the insurance is to prevent any unfortunate events fall upon Neymar, to insure against the down payment of 10m EURO, until June 2014, then we could pretty much speculate that such transfer would only come on the same date as the insurance expired.