China Growth Stocks

[tenenbaum]

CNAM -- "indicating a very high probability that the option will be exercised"

You can only make that assumption if the option is deep in the money, though, since both N(d) terms certainly will not be close to 1 in this case.

Think of it this way: The June $10 strike NEP call traded at $0.35 yesterday. That option is deeper out of the money and has a much shorter time to expiration. There is little chance that the CNAM warrant could be priced for less.

We don't need to use closed form estimates of options prices, though, we can use options calculators:

http://www.intrepid.com/robertl/option-pricer4.html?q=~robertl/option-pricer4.html

Using the following parameters:

So = $6.9 (price at time of deal announcement)
X = $7.5
r = 2.5%
div = 0
T = 5 years
Implied Vol = 60% (CNAM historical vol is > 80% and most US listed CN stocks trade at imp vols north of 60%)

I get a price of $3.5 for an American exercise option. Granted, warrants result in dilution while options do not so the pricing will be a bit different, but this gets us much closer to the actual fair value. At $0.27 these warrants would be a back-up-the-truck and mortgage the house/wife/kids buy.