Replies to post #38650 on China Growth Stocks

[researcher59]

karins: as others have pointed out, the warrants are worth far more than $0.27 .... that might be fair value if they were expiring in a month or two !

I'm familiar with valuations of options and warrants because I trade them a lot ....

As Derek2000 pointed out, if these warrants were available at a mere $0.27 on the market, I'd "back up the truck" to buy all I could. Even at $1 they'd be a great bargain.

Imagine if the stock rises to $27.50 in 5 years at expiration. The warrants would then be worth $20 .... or 74x the purchase price of $0.27 that you suggest ! Meanwhile a stockholder would only get a return of a bit over 3x .... so common sense dictates that the warrants are worth far more than $0.27.

[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.