With the price of oil recently bouncing around between $110 and $111 per barrel (thanks to the Federal Reserve trashing the dollar) it seems almost inevitable that the MacroShares oil arbitrage that I first wrote about in November will soon pay off. To recap the situation: The UCR and DCR shares have been trading at discounts and premiums respectively of between $5 - 7 per share but when the termination trigger is hit those shares will be redeemed at NAV. The early termination trigger in this case is 3 consecutive days of oil settling at or above $111 per barrel and when redemption occurs the UCR shareholders will receive a $5 per share bonus at the expense of the DCR shareholders. Apparently, this will come as a shock to the DCR shareholders because why else would they own these things unless they are clueless.

With the end near it's time to really understand how this termination process will work. I tried to figure it out on my own by reading the prospectus but it got complicated enough that I had to call them to clarify a few points. They were extremely helpful and seem to really be juiced about their product offerings.

So here's the deal. Once the trigger is hit the shareholders are going to have to wait until the next distribution date to receive their distribution. Since those distribution dates occur at the end of the calendar quarters I'm really hoping we hit the trigger before the end of this month. I want my money! However, let's say the trigger is hit on April 1. Then we will have to wait until the end of June to collect. Under this assumption the timing would be as follows:

June 25 would be the last trading day and the valuation date
June 26 would be the "distribution date"
June 30 would be the record date
July 3 payment would occur

What happens in the meantime? Well, fortunately, the shares will continue to trade until the distribution date. It will be interesting to see if they trade at a discount or a premium during this time period. If they do that will be even weirder than the fact that they are out of whack now. However, there is one other twist here. The actual redemption amount will be determined on the last trading day prior to the distribution date, which means the final distribution might be more or less than what would be determined based upon the price of oil when the trigger was hit. In and of itself this is not a problem unless.......the price of oil goes above $120. Why is that a problem? Because at $120 the Down trust runs out of money to pay the Up trust! So the solution is to cap the payout to the UCR holders to no more than that which would be based upon $120 oil - which should be around $40 per UCR share. I don't see this as a huge problem because there's a reasonable chance that oil won't get to $120 by the distribution date and if it does then at least you know what you own and you can trade into and out of the old reliable OIL or USO shares.