EFTA01393111.pdf

The base may be adjusted from time to time to re- flect such events as capitalization changes affecting the constituent securities of the index (e.g., issuance of new shares) or to maintain continuity when securities are added to or dropped from the index. These adjust- ments are generally designed so that the index level will change only as a result of price changes of constit- uent securities during trading. Securities may be dropped from an index because of events such as mergers and liquidations or because a particular security is no longer thought to be repre- sentative of the types of stocks constituting the index. Securities may also be added to an Index from time to time. Adjustments in the base level of an index, addi- tions and deletions of constituent securities, and simi- lar changes are within the discretion of the publisher of the index and will not ordinarily cause any adjustment in the terms of outstanding index options. However, an adjustment panel has authority to make adjustments if the publisher of the underlying index makes a change in the index's composition or method of calculation that in the panel's determination, may cause signifi- cant discontinuity in the index level. Different stock indexes are calculated in different ways. Accordingly, even where indexes are based on identical securities, they may measure the relevant market differently because of differences in methods of calculation. Often the market prices of the securities in the index group are "capitalization weighted." That is, in calculating the index value, the market price of each constituent security is multiplied by the number of shares outstanding. Because of this method of calcu- lation, changes in the prices of the securities of larger corporations will generally have a greater influence on the level of a capitalization weighted index than price changes affecting smaller corporations. Other methods may be used to calculate stock in- dexes. For example; in one method known as "equal- dollar weighting," the index is established by estab- lishing an aggregate market value for every constituent security of the index and then determining the number of shares of each security by dividing such aggregate market value by the then current market price of the security. The base level of the index is established by dividing the total market value of all constituent securi- ties by a fixed index divisor. Thereafter, the number of shares of the constituent securities and the index divi- sor are adjusted at periodic intervals in order to have 24 CONFIDENTIAL - PURSUANT TOCRIESCIRMS996509 P. 6(e) CONFIDENTIAL SDNY_GM_00244693 EFTA01393111